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 $1,249,000 based on production of 330,000 handheld consoles and 84,000 home consoles. Direct labor and direct materials costs were as follows. Direct labor Materials Handheld $1,158,250 740,000 Home $403,000 678,000 Total $1,561, 250 1,418,000 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 40 10 Cost Driver Number of production runs Quality tests performed Shipping orders processed Total overhead Costs Assigned $ 500,000 589,000 160,000 $1,249,000 12 Total 50 31 160 110 50 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?

Answer 1

	overhead	total cost per unit
handheld	738,000	7.99
home	511,000	18.95

working:

allocation of overheads to products:

	hand held	home
number of production runs	(500,000)*40/50 =>400,000	(500,000)*10/50=>100,000
quality tests performed	(589,000)*12/31=>228,000	(589,000)*19/31=>361,000
shipping orders processed	(160,000)*110/160=>110,000	(160,000)*50/160=>50,000
total overhead allocated	738,000	511,000

calculation of cost per unit:

	hand held	home
direct labor	1158250	403,000
materials	740000	678000
overhead	738,000	511,000
total cost	$2,636,250	$1,592,000
cost per unit ($2,636,250 /330,000 units) ($1,592,000/84,000 units)	$7.99	$18.95