Question

Munoz Sporting Equipment manufactures baseball bats and tennis rackets. Department B produces the baseball bats, and Department T produces the tennis rackets. Munoz currently uses plantwide allocation to allocate its overhead to all products. Direct labor cost is the allocation base. The rate used is 100 percent of direct labor cost. Last year, revenue, materials, and direct labor were as follows:

	Baseball Bats			Tennis Rackets
Sales revenue	$	1,530,000		$	1,000,000
Direct labor		290,000			145,000
Direct materials		554,000			288,000

Required:

a. Compute the profit for each product using plantwide allocation.

b. Maria, the manager of Department T, was convinced that tennis rackets were really more profitable than baseball bats. She asked her colleague in accounting to break down the overhead costs for the two departments. She discovered that had department rates been used, Department B would have had a rate of 50 percent of direct labor cost and Department T would have had a rate of 200 percent of direct labor cost. Recompute the profits for each product using each department’s allocation rate (based on direct labor cost).

Answer 1

a. Compute the profit for each product using plantwide allocation.

	Baseball bats	Tennis rackets
Sales revenue	$1530000	$1000000
Less: Costs
Direct labor	$290000	$145000
Direct materials	554000	288000
Overhead	(290000*100%)= 290000	(145000*100%)= 145000
Total costs	1134000	578000
Profit	$396000	$422000

b. Maria, the manager of Department T, was convinced that tennis rackets were really more profitable than baseball bats. She asked her colleague in accounting to break down the overhead costs for the two departments. She discovered that had department rates been used, Department B would have had a rate of 50 percent of direct labor cost and Department T would have had a rate of 200 percent of direct labor cost. Recompute the profits for each product using each department’s allocation rate (based on direct labor cost).

	Baseball bats	Tennis rackets
Sales revenue	$1530000	$1000000
Less: Costs
Direct labor	$290000	$145000
Direct materials	554000	288000
Overhead	(290000*50%)= 145000	(145000*200%)= 290000
Total costs	989000	723000
Profit	$541000	$277000

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