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 $1,471,000 based on production of 350,000 handheld consoles and 107,000 home consoles. Direct labor and direct materials costs were as follows.

	Handheld			Home			Total
Direct labor	$	1,426,750		$	412,000		$	1,838,750
Materials		780,000			666,000			1,446,000

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	$	720,000		50	10	60
Quality tests performed		527,000		12	19	31
Shipping orders processed		224,000		110	50	160
Total overhead	$	1,471,000

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?

Answer 1

REQ A		Overhead	Total Cost per unit
	Handheld	958000	9.04	(See Note 1)
	Home	513000	14.87	(See Note 1)
	Note 1: Overhead allocation sheet
					Handheld	Home
	Activity	Total OH Cost	Total Cost Driver	OH Rate	Driver Incurred	OH Cost assigned	Driver Incurred	OH Cost assigned
	Production runs	720000	60	12000.00	50	600000	10	120000
	Quality test	527000	31	17000.00	12	204000	19	323000
	Shipping	224000	160	1400.00	110	154000	50	70000
	Total	1471000				958000		513000
	Add: Material cost					780000		666000
	Add labour cost					1426750		412000
	No. of Units					350000		107000
	Total Cost per unit					9.04		14.87
REQ B		Overhead	Total Cost per unit
	Handheld	1141400	9.57	(See Note 2)
	Home	329600	13.16	(See Note 2)
	Note 2" Predetermined Overhead rate = Estimated overhead / estimated direct cost
	= 1471000/1838750
	0.80	Per of direct labour
		Handheld	Home
	Direct material	780000	666000.00
	Direct labour	1426750	412000.00
	Overhead	1141400	329600
	Total cost	3348150	1407600
	No. of units	350000	107000
	Total cost per unit	9.57	13.16