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 $277,600. During that time, the company produced 12,100 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	$	96,800	$	84,000	$	180,800
Direct labor		96,800		42,000		138,800

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	$	105,600		1,000		9,000		10,000
Number of production runs		80,000		10		30		40
Number of inspections		92,000		15		35		50
Total overhead	$	277,600

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

	Activity Level			M-008	M-123
Cost Driver	Costs	Total Activity	Activity rate = Overhead cost/Total Activity Level	Activity	Overhead assigned = Activity Consumed*Rate	Activity	Overhead assigned = Activity Consumed*Rate
Number of machine-hours	105,600	10,000	10.56	1,000	10560	9,000	95040
Number of production runs	80,000	40	2000	10	20000	30	60000
Number of inspections	92,000	50	1840	15	27600	35	64400
Total overhead	277,600			Total	58160		219440
Calculation of cost per unit
	M-008	M-123
Direct Materials	96800	84000
Direct Labor	96800	42000
Overheads	58160	219440
Total cost	251760	345440
Number of Units	12100	2100
Cost per unit	20.8066116	164.5
If Direct labor cost is used, Overhead allocated = Total overheads*Direct labor cost of product/Total labor cost
	M-008	M-123
Direct Materials	96800	84000
Direct Labor	96800	42000
Overheads	193600	84000
Total cost	387200	210000
Number of Units	12100	2100
Cost per unit	32	100