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 $1,445,000 based on production of 280,000 handheld consoles and 119,000 home consoles. Direct labor and direct materials costs were as follows:

	Handheld			Home			Total
Direct labor	$	1,401,250		$	405,000		$	1,806,250
Materials		760,000			671,000			1,431,000

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
Cost Driver	Costs Assigned			Handheld	Home	Total
Number of production runs	$	660,000		45	10	55
Quality tests performed		589,000		12	19	31
Shipping orders processed		196,000		90	50	140
Total overhead	$	1,445,000

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? (Round "Total cost per unit" to 2 decimal places.)

b. How much 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? (Do not round intermediate calculations. Round "Total cost per unit" to 2 decimal places.)

Answer 1

a. cost allocated ABC based

	handheld	home
number of production runs	540000[660000/55]*45	120000[660000/55]*10
quality test performed	228000[589000/31]*12	361000[589000/31]*19
shipping order processed	126000[196000/140]*90	70000[196000/140]*50
total cost manufacturing overhead cost alloacated	894000[540000+228000+126000]	551000 [120000+361000+70000]

total cost per unit

	handheld	home
material	1401250	405000
labor	760000	671000
overhead allocated	894000	551000
Total cost	3055250	1627000
units produced	280000	119000
cost per unit	10.91$[3055250/280000]	13.67$[1627000/119000]

2.labor cost allocation

	handheld	home
total overhead			1445000
labor cost			1806250
per labor cost allocation			0.8$
cost allocation	1121000[0.8*1401250]	324000[0.8*405000]	1445000

unit cost

	handheld	home
material	1401250	405000
labor	760000	671000
overhead allocated	1121000	324000
Total cost	3282250	1400000
units produced	280000	119000
cost per unit	11.72$[3282250/280000]	11.76$[1400000/119000]