In: Accounting
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).