Question

Exercise 9-37 Activity-Based versus Traditional Costing (LO 9-4, 5, 6) 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 $1,217,000 based on production of 340,000 handheld consoles and 117,000 home consoles. Direct labor and direct materials costs were as follows: Handheld Total Home Direct labor $1,111,250 720,000 $410,000 674,000 $1,521,250 1,394,000 Materials Management has determined that overhead costs are caused by three cost drivers. These drivers and their costs for last year are as follows: Activity Level Handheld Costs Assigned $ 450,000 580,000 187,000 $1,217,000 Cost Driver Home Total 45 Number of production runs Quality tests performed Shipping orders processed 35 10 13 110 16 29 60 170 Total overhead
Please give explanation on how to get each number, thanks!

Answer 1

B 29 170 1 1) Computation of Activity rates 3 Cost driver Cost assigned Total activity level Activity rate 4 Number of production runs 450000 45 10000 5 Quality test performed 580000 20000 6 Shipping orders processed 187000 1100 7 8 Total 1217000 9 Computation of Overhead assigned to products 11 Handheld Home 12 Activity cost pool Activity level used Activity rate Cost assigned Activity level used Activity rate Cost assigned 13 Number of production runs 10000 350000 101 10000 100000 14 Quality test performed 20000 260000 16 20000 320000| 15 Shipping orders processed 110 1100 121000 60111001 660001 16 17 Total Overhead cost assigned 731000 486000 10 35 - 131 18 19 Computation of Total Cost per unit 20 Handheld 21 Direct labor 11112501 22 Materials 720000 23 Overhead Costs 731000 24 Total Costs 2562250 25 No. of units 340000 26 Cost per unit 7.54 Home 410000 674000 486000 1570000 117000 13.42 27

28 2) 29 Overhead allocated to Handheld = $1217000 / $1521250 *$ 1111250 = 889000 30 Overhead allocated to Home = $1217000 / $1521250 * $410000 = 328000 31 Computation of Total Cost per unit 32 Handheld Home 33 Direct labor 11112501 410000 34 Materials 720000 674000 35 Overhead Costs 889000 328000 36 Total Costs 2720250 1412000 37 No. of units 340000 117000 38 Cost per unit 8.00 12.07 39 40

A 145 1 1) Computation of Activity rates 3 Cost driver Cost assigned Total activity level 4 Number of production runs 450000 5 Quality test performed 580000 6 Shipping orders processe187000 170 7 8 Total =SUM(B4:B6) Activity rate =B4/C4 =B5/C5 =B6/C6 29 9 60 10 Computation of Overhead assigned to products 11 Handheld Home 12 Activity cost pool Activity level used Activity rate i Cost assigned Activity level used Activity rate Cost assigned 13 Number of production runs 35 10000 =B13*C13 10 10000 =E13*F13 14 Quality test performed 13 20000 =B14*C14 16 20000 =E14*F14 15 Shipping orders processel 110 1100 =B15*C15 1100 =E15*F15 16 17 Total Overhead cost assigned =D13+D14+D15 =G13+G14+G15 18 19 Computation of Total Cost per unit 20 Handheld Home 21 Direct labor 1111250 410000 22 Materials 720000 674000 23 Overhead Costs =D17 =G17 24 Total Costs =B21+B22+B23 =C21+C22+C23 25 No. of units 340000 117000 26 Cost per unit =B24/B25 =C24/C25 27

32 28 2) 29 Overhead allocated to Har 30 Overhead allocated to Hor 31 Computation of Total Cost per unit Handheld Home 33 Direct labor 1111250 410000 34 Materials 1720000 6 74000 35 Overhead Costs 889000 328000 36 Total Costs =SUM(B33:B35) =SUM(C33:C35) 37 No. of units 340000 117000 38 Cost per unit =B36/B37 =C36/C37 39