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 $301,600. During that time, the company produced 12,600 units of the M-008 and 2,500 units of the M-123. The direct costs of production were as follows.

	M-008		M-123		Total
Direct materials	$	100,800	$	100,000	$	200,800
Direct labor		100,800		50,000		150,800

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	$	117,100		8,000		2,000		10,000
Number of production runs		90,000		10		30		40
Number of inspections		94,500		20		30		50
Total overhead	$	301,600

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 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?

Answer 1

	Calculation Of Predetermined Overhead rate on the basis Direct Labour Cost
	Overhead Rate                  =	Total Estimated Manufacturing Overhead	"/" By	Total Labor Cost
	Overhead Rate                  =	$                                    301,600	"/" By	150,800
	Overhead Rate                  =	$                                           2.00	Per $ Labor Cost
Solution: B
	Calculation of Cost price Per units as per Traditional Costing Method
		Product M - 008	Product M - 123
	Particulars	Amount in $	Amount in $
	Direct Materials	$                                    100,800	$                      100,000
	Direct Labour	$                                    100,800	$                         50,000
	Overhead Cost	$                                    201,600	$                      100,000
		(100,800 X $ 2)	($50,000 X $ 2)
	Total Cost	$                                    403,200	$                      250,000
	Divide By No. of Units	12,600	2,500
	Cost Per Unit	$                                         32.00	$                         100.00
Solution: A
Step 1: Calculation of the Cost Driver Rate
	Cost Driver Rate = Activity Cost / Cost Driver
	Activity	Cost Driver	Activity Cost	"/" By	Cost Driver	" = " To	Cost Driver Rate
	Machine Hours	No. of Machine Hours	$                      117,100	"/" By	10,000	" = " To	$                          12
	Production Runs	No. of Production Runs	$                         90,000	"/" By	40	" = " To	$                    2,250
	Inspection	No. of Inspection	$                         94,500	"/" By	50	" = " To	$                    1,890
Step 2 : Calculation of the Cost as per ABC
	Calculation of the Cost allocation for Activity of Product M - 008
	Activity	Activity Used	"X " By	Cost Driver rate	Cost
	Machine Hours	8,000	"X " By	$                                12	$                   93,680
	Production Runs	10	"X " By	$                          2,250	$                   22,500
	Inspection	20	"X " By	$                          1,890	$                   37,800
		Total Cost			$                 153,980
	CALCULATION OF UNIT PRODUCT COST PER UNIT -
		Product M - 008
	Direct Materials	$                                    100,800
	Direct Labour	$                                    100,800
	Overhead Cost	$                                    153,980
	Total Cost	$                                    355,580
	Divide By	"/" By
	No. of Units Produced	12,600
	Cost Per Unit	$                                         28.22
	Answer = Cost Per Unit = $ 28.22
	Calculation of the Cost allocation for Activity of Product M - 123
	Activity	Activity Used	"X " By	Cost Driver rate	Cost
	Total Cost	2,000	"X " By	$                          11.71	$                   23,420
	Divide By	30	"X " By	$                    2,250.00	$                   67,500
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