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 $1,324,000 based on production of 360,000 handheld consoles and 106,000 home consoles. Direct labor and direct materials costs were as follows.

Handheld Home Total

Direct labor $ 1,266,000 $ 389,000 $ 1,655,000

Materials   750,000 656,000 1,406,000

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

Costs Assigned Handheld Home Total

Number of production runs $ 715,000 50 5 55

Quality tests performed 459,000 10 17 27

Shipping orders processed 150,000 100 50 150

Total overhead $ 1,324,000

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	920000	8.16	(See Note 1)
	Home	404000	13.67	(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	715000	55	13000.00	50	650,000	5	65,000
	Quality test	459000	27	17000.00	10	170,000	17	289,000
	Shipping	150000	150	1000.00	100	100,000	50	50,000
	Total	1324000				920,000		404,000
	Add: Material cost					750000		656000
	Add labour cost					1266000		389000
	No. of Units					360000		106000
	Total Cost per unit					8.16		13.67
REQ B		Overhead	Total Cost per unit
	Handheld	1012800	8.41	(See Note 2)
	Home	311200	12.79	(See Note 2)
	Note 2" Predetermined Overhead rate = Estimated overhead / estimated direct cost
	=1324000/1655000
	0.80	Per of direct labour
		Handheld	Home
	Direct material	750,000	656,000
	Direct labour	1,266,000	389,000
	Overhead	1,012,800	311,200
	Total cost	3028800	1356200.00
	No. of units	360000	106000
	Total cost per unit	8.41	12.79