Question

Exercise 9-43 (Algo) 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 $1,477,000 based on production of 290,000 handheld consoles and 86,000 home consoles Direct labor and direct materials costs were as follows. Total Direct labor Materials Handheld Home $1,451,250 $395,000 7 10, 809691,000 $1,846,250 1,401,000 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 Handheld Home costs Asal Costs Assigned $ 715,000 Total Cost Oriver Number of production runs Quality tests performed Shipping orders processed Total overhead 160 192,000 51,472,000

Answer 1

Activity Rate = Overhead/Total Driver
	Cost	Handheld	Home	Total	Rate
Number of production runs	715000	45	10	55	13000
Quality tests performed	570000	13	17	30	19000
Shipping orders processed	192000	110	50	160	1200
Total	1477000
Overhead Assigned = Rate*Driver consumed
	Handheld	Home
Number of production runs	585,000	130,000
Quality tests performed	247,000	323,000
Shipping orders processed	132,000	60,000
Total	964,000	513,000
Calculation of cost per unit
	Handheld	Home
Direct labor	1,451,250	395,000
Material	710,000	691,000
Overhead	964,000	513,000
Total cost	3,125,250	1,599,000
Number of units	290,000	86,000
Cost per unit	10.77672414	18.59302326
If Direct labor cost is used
	Handheld	Home
Direct labor	1,451,250	395,000
Material	710,000	691,000
Overhead	1,161,000	316,000
Total cost	3,322,250	1,402,000
Number of units	290,000	86,000
Cost per unit	11.45603448	16.30232558