Question

Doaktown Products manufactures fishing equipment for recreational uses. The Miramichi plant produces the company’s two versions of a special reel used for river fishing. The two models are the M-008, a basic reel, and the M-123, a new and improved version. Cost accountants at company headquarters have prepared costs for the two reels for the most recent period. The plant manager is concerned. The cost report does not coincide with her intuition about the relative costs of the two models. She has asked you to review the cost accounting and help her prepare a response to headquarters.

Manufacturing overhead is currently assigned to products based on their direct labor costs. For the most recent month, manufacturing overhead was $298,400. During that time, the company produced 12,900 units of the M-008 and 2,300 units of the M-123. The direct costs of production were as follows:

	M-008		M-123		Total
Direct materials	$	103,200	$	92,000	$	195,200
Direct labor		103,200		46,000		149,200

Management determined that overhead costs are caused by three cost drivers. These drivers and their costs for last year were as follows:

			Activity Level
Cost Driver		Costs		M-008		M-123		Total
Number of machine-hours	$	116,900		8,000		2,000		10,000
Number of production runs		90,000		20		20		40
Number of inspections		91,500		20		35		55
Total overhead	$	298,400

Required:

a. How much overhead will be assigned to each product if these three cost drivers are used to allocate overhead? What is the total cost per unit produced for each product? (Round your intermediate calculations and final answers to 2 decimal places.)

b. How much of the overhead will be assigned to each product if direct labor cost is used to allocate overhead? What is the total cost per unit produced for each product? (Round "Total unit cost" to 2 decimal places.)

Answer 1

we will first determined overhead rates per activity

Activity	Cost	cost driver	OH rate
Machine cost	$116,900	10,000	$11.69 per machien hour[$116,900/10,000]
production cost	$90,000	40	$2,250 per prpduction run[$90,000/40]
inspection cost	$91,500	55	$1,663.64 per inspection[$91,500/55]

we will now allocate cost

Activity	OH rate	M-008	M-123
Machine cost	$11.69 per machien hour[$116,900/10,000]	$93,520($11.69*8,000)	$23,380($11.69*2,000)
production cost	$2,250 per prpduction run[$90,000/40]	$45,000($2,250*20)	$45,000($2,250*20)
inspection cost	$1,663.64 per inspection[$91,500/55]	$33,272.8($1663.64*20)	$58,227.4($1663.64*35)
Total		$171,792.8	$126,607.4

,cost per unit

	M-008	M-123
Direct material	$103,200	$92,000
Direct labor	$103,200	$46,000
Overhead	$171,792.8	$126,607.4
Total cost	$378,192.8	$264,607.4
Number of units produced	12,900	2,300
cost per unit	$29.32[$378,193/12,900]	$115.05[$264,607/2300]

2 . allocating overhead ont he basis of labor cost

total labor cost = $149,200

M-008

=Total overhead /total labor cost*labor cost of M-008

=$298,400/$149,200 *$103,200

=$206,400

M-123

=$298,400/$149,200*46,000

=$92,000

	M-008	M-123
Direct material	$103,200	$92,000
Direct labor	$103,200	$46,000
Overhead	$206,400	$92,000
Total cost	$412,800[$103,200+$103,200+$206,400]	$230,000 [$92,000+$46,000+$92,000]
Number of units produced	12,900	2,300
cost per unit	$32[$412,800/12,900]	$100[$230,000/2300]