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 $328,000. During that time, the company produced 15,000 units of the M-008 and 2,200 units of the M-123. The direct costs of production were as follows:

	M-008		M-123		Total
Direct materials	$	120,000	$	88,000	$	208,000
Direct labor		120,000		44,000		164,000

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	$	154,000		8,000		2,000		10,000
Number of production runs		80,000		20		20		40
Number of inspections		94,000		25		35		60
Total overhead	$	328,000

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? (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

a)
Cost Driver		Costs	M-008	M-123	Total	Cost per unit of cost driver
Number of machine-hours		$        154,000.00	8,000	2,000	10,000	$             15.40
Number of production runs		$          80,000.00	20	20	40	$       2,000.00
Number of inspections		$          94,000.00	25	35	60	$       1,566.67
Total overhead		$        328,000.00
	Cost per unit of cost driver	Units of cost driver	Total Cost - M-008	Units of cost driver	Total Cost - M-123
Direct materials			$         120,000		$         88,000
Direct labor			$         120,000		$         44,000
Overhead Allocation
Number of machine-hours	$            15.40	8,000.00	$   123,200.00	2,000.00	$   30,800.00
Number of production runs	$      2,000.00	20.00	$     40,000.00	20.00	$   40,000.00
Number of inspections	$      1,566.67	25.00	$     39,166.67	35.00	$   54,833.33
Total Cost			$   442,366.67		$ 257,633.33
Total Units			$     15,000.00		$      2,200.00
Cost per Unit			$              29.49		$         117.11
b)
	Total Cost - M-008	Total Cost - M-123
Direct materials	$        120,000	$                88,000	$         208,000
Direct labor	$        120,000	$                44,000	$         164,000
Overhead Allocation in ratio of direct labor	$        240,000	$                88,000	$         328,000
Total Cost	$ 480,000.00	$        220,000.00	$   700,000.00
Total Units	$    15,000.00	$            2,200.00
Cost per Unit	$            32.00	$                100.00