Question

Maglie Company manufactures two video game consoles: handheld and home. The handheld consoles are smaller and less expensive than the home consoles. The company only recently began producing the home model. Since the introduction of the new product, profits have been steadily declining. Management believes that the accounting system is not accurately allocating costs to products, particularly because sales of the new product have been increasing.

Management has asked you to investigate the cost allocation problem. You find that manufacturing overhead is currently assigned to products based on their direct labor costs. For your investigation, you have data from last year. Manufacturing overhead was $1,338,000 based on production of 310,000 handheld consoles and 100,000 home consoles. Direct labor and direct materials costs were as follows.

	Handheld			Home			Total
Direct labor	$	1,284,500		$	388,000		$	1,672,500
Materials		720,000			711,000			1,431,000

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

				Activity Level
Cost Driver	Costs Assigned			Handheld	Home	Total
Number of production runs	$	605,000		40	15	55
Quality tests performed		551,000		12	17	29
Shipping orders processed		182,000		100	40	140
Total overhead	$	1,338,000

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?

b. How much 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?

• 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 "Total Cost per Unit" to 2 decimal places.)

	Overhead Total Cost per Unit Handheld Home

• Required B

How much 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? (Do not round intermediate calculations. Round "Total cost per unit" to 2 decimal places.)

	Overhead Total Cost per Unit Handheld Home

Answer 1

a.

Cost driver	Activity rate	Handheld	Home
Number of production runs	$11,000 ($605,000/55)	$440,000 (40*$11,000)	$165,000 (15*$11,000)
Quality test performed	19,000 (551,000/29)	228,000 (12*$19,000)	323,000 (17*$19,000
Shipping order processed	1,300 (182,000/140)	130,000 (100*$1,300)	52,000 (40*$1,300)
Total overhead costs		$798,000	$540,000

	Handheld	Home
Direct labor	$1,284,500	$388,000
Materials	720,000	711,000
Overhead cost	798,000	540,000
Total cost	$2,802,500	$1,639,000
Total units	310,000	100,000
Total cost per unit	$9.04	$16.39

	Overhead	Total cost per unit
Handheld	$798,000	$9.04
Home	540,000	16.39

B.

Overhead allocation rate = Estimated manufacturing overhead / Direct labor cost

Overhead allocation rate = $1,338,000 / 1,672,500 * 100 = 80%

	Handheld	Home
Direct labor	$1,284,500	$388,000
Materials	720,000	711,000
Overhead cost	1,027,600 (1,284,500*80%)	310,400 (388,000*80%)
Total cost	$3,032,100	$1,409,400
Total units	310,000	100,000
Total cost per unit	$9.78	$14.09

	Overhead	Total cost per unit
Handheld	$1,027,600	$9.78
Home	310,400	14.09