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In: Accounting

Koontz Company manufactures two models of industrial components—a Basic model and an Advanced Model. The company...

Koontz Company manufactures two models of industrial components—a Basic model and an Advanced Model. The company considers all of its manufacturing overhead costs to be fixed and it uses plantwide manufacturing overhead cost allocation based on direct labor-hours. Koontz’s controller prepared the segmented income statement that is shown below for the most recent year (he allocated selling and administrative expenses to products based on sales dollars):

Basic Advanced Total
Number of units produced and sold 20,000 10,000 30,000
Sales $ 3,000,000 $ 2,000,000 $ 5,000,000
Cost of goods sold 2,300,000 1,350,000 3,650,000
Gross margin 700,000 650,000 1,350,000
Selling and administrative expenses 720,000 480,000 1,200,000
Net operating income (loss) $ (20,000 ) $ 170,000 $ 150,000

Direct laborers are paid $20 per hour. Direct materials cost $40 per unit for the Basic model and $60 per unit for the Advanced model. Koontz is considering a change from plantwide overhead allocation to a departmental approach. The overhead costs in the company’s Molding Department would be allocated based on machine-hours and the overhead costs in its Assembly and Pack Department would be allocated based on direct labor-hours. To enable further analysis, the controller gathered the following information:

Molding Assemble and Pack Total
Manufacturing overhead costs $ 787,500 $ 562,500 $ 1,350,000
Direct labor hours:
Basic 10,000 20,000 30,000
Advanced 5,000 10,000 15,000
Machine hours:
Basic 12,000 - 12,000
Advanced 10,000 - 10,00

2. Using a departmental approach:

a. Calculate the departmental overhead rates.

b. Calculate the total amount of overhead that would be assigned to each product.

c. Using your departmental overhead cost allocations, redo the controller’s segmented income statement (continue to allocate selling and administrative expenses based on sales dollars).

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