Question

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 $1,411,000 based on production of 290,000 handheld consoles and 98,000 home consoles. Direct labor and direct materials costs were as follows.

	Handheld			Home			Total
Direct labor	$	1,368,750		$	395,000		$	1,763,750
Materials		790,000			675,000			1,465,000

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	$	715,000		40	15	55
Quality tests performed		504,000		10	18	28
Shipping orders processed		192,000		110	50	160
Total overhead	$	1,411,000

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?

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?

Answer 1

a) Calculate overhead assigned and unit Cost

	Handheld	Home
Overhead based on production runs	520000	195000
Overhead based on tests performed	180000	324000
Overhead based on shipping orders	132000	60000
Total Overhead	832000	579000
Direct material	790000	675000
Direct labor	1368750	395000
Total Cost	2990750	1649000
Unit	290000	98000
Unit Cost	10.31	16.83

b) Calculate overhead assigned and unit Cost

	Handheld	Home
Total Overhead	1095000	316000
Direct material	790000	675000
Direct labor	1368750	395000
Total Cost	3253750	1386000
Unit	290000	98000
Unit Cost	11.22	14.14