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 $1,317,000 based on production of 300,000 handheld consoles and 102,000 home consoles. Direct labor and direct materials costs were as follows. Direct labor Materials Handheld $1,249,250 710,000 Home $397,000 680,000 Total $1,646,250 1,390,000 Management has determined that overhead costs are caused by three cost drivers. These drivers and their costs for last year are as follows. Total Activity Level Handheld Home 10 13 30 Cost Driver Number of production runs Quality tests performed Shipping orders processed Total overhead 40 Costs Assigned $ 520,000 589,000 208,000 $1,317,000 18 31 100 60 160 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)
	A	B	A/B
Cost driver	Costs Pool	Total activity level	Activity rate
No of production runs	$                      520,000	40	$                                13,000
Quality tests performed	$                      589,000	31	$                                19,000
Shipping orders processed	$                      208,000	160	$                                  1,300
	Handheld				Home
	No of production runs	Quality tests performed	Shipping orders processed		No of production runs	Quality tests performed	Shipping orders processed
Activity rate	$                        13,000	$                           19,000	$                                  1,300		$                        13,000	$                           19,000	$                                  1,300
*activity Level	30	13	100		10	18	60
Activity OH	$                      390,000	$                         247,000	$                             130,000		$                      130,000	$                         342,000	$                                78,000
Total OH	$                      767,000				$                      550,000
	Handheld	Home
D.Labor	$                   1,249,250	$                         397,000
materials	$                      710,000	$                         680,000
Total OH	$                      767,000	$                         550,000
Total costs	$                   2,726,250	$                      1,627,000
Units produced	300,000	102,000
Units costs	$                             9.09	$                             15.95

	Handheld	Home	Total
Direct labor cost	$                   1,249,250	$                         397,000	$                          1,646,250
Direct labor cost %	75.88%	24.12%
Total OH	$                   1,317,000
		%	OH
Handheld	$                   1,317,000	75.88%	$                             999,400
Home	$                   1,317,000	24.12%	$                             317,600
	Handheld	Home
D.Labor	$                   1,249,250	$                         397,000
materials	$                      710,000	$                         680,000
Total OH	$                      999,400	$                         317,600
Total costs	$                   2,958,650	$                      1,394,600
Units produced	300,000	102,000
Units costs	$                             9.86	$                             13.67

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