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 $244,000. During that time, the company produced 10,000 units of the M-008 and 2,100 units of the M-123. The direct costs of production were as follows.

	M-008		M-123		Total
Direct materials	$	80,000	$	84,000	$	164,000
Direct labor		80,000		42,000		122,000

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	$	64,000		8,000		2,000		10,000
Number of production runs		80,000		20		20		40
Number of inspections		100,000		30		20		50
Total overhead	$	244,000

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?

Total Overhead for M-008? Total Overhead for M-123?

Total Unit Cost for M-008? Total Unit Cost for M-123?

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?

Total Overhead for M-008? Total Overhead for M-123?

Total Unit Cost for M-008? Total Unit Cost for M-123?

Answer 1

Part a –

Calculation of Overhead Assigned to each product

						M-008	M-123
Activity	Overhead Cost (A)	Activity Drivers (B)	Activity Rate (C = A/B)	Activity Driver incurred (G)	Overhead Assigned (G*C)	Activity Driver incurred (O)	Overhead Assigned (O*C)
Number of Machine hours	$64,000	10000	Machine hours	$6.40	Per Machine Hour	8000	$51,200	2000	$12,800
Number of Production runs	$80,000	40	Production runs	$2,000	Per Production run	20	$40,000	20	$40,000
Number of inspections	$100,000	50	Inspections	$2,000	Per Inspection	30	$60,000	20	$40,000
Total	$244,000						$151,200		$92,800

Calculation of Unit Cost

	M-008	M-123
Direct Materials	$80,000	$84,000
Direct Labor	$80,000	$42,000
Assigned Total Overheads	$151,200	$92,800
Total Cost	$311,200	$218,800
Divided by: Total Units Produced	10,000	2,100
Unit Cost	$31.12	$104.19

Part b –

Overhead Rate per direct labor dollar = Total Estimated Overhead Costs $244,000 / Total Direct labor dollars $122,000

= $2 per direct labor dollar

Total Overhead for M-008 = Direct labor Costs $80,000 * Overhead Rate $2 per direct labor dollar

= $160,000

Total Overhead for M-123 = Direct labor Costs $42,000 * Overhead Rate $2 per direct labor dollar

= $84,000

Calculation of Total Unit Cost

	M-008	M-123
Direct Materials	$80,000	$84,000
Direct Labor	$80,000	$42,000
Assigned Total Overheads	$160,000	$84,000
Total Cost	$320,000	$210,000
Divided by: Total Units Produced	10,000	2,100
Total Unit Cost	$32.00	$100.00

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