Question

Problem 1. Laughton Corporation makes two styles of cases for compact disks, the standard case and the deluxe case. The company has assigned $210,000 in monthly manufacturing overhead to three cost pools as follows: $90,000 to machining costs, S60,000 to production set-up costs, and $60,000 to inspection costs. Additional monthly data is provided below: Standard Case Deluxe Case Sales revenue $480,000 $189,000 Direct materials $135,000 $45,000 $30,000 $105,000 Direct labor Machine hours 24,000 6,000 Production runs 7 12 Units produced and sold 33,000 3,000 The first and last unit in each production run is inspected for quality control purposes. Inspection costs are allocated to the products based on the number of inspections required. Machining costs are allocated to products using machine hours as an activity base. Set-up costs are allocated to products based on the number of production runs each product line requires. Required: (1.)Allocate manufacturing overhead from the activity cost pools to each product line. (2.) Compare the total per-unit cost of manufacturing standard cases and deluxe cases. (3.) On a per-unit basis, which product appears to be more profitable?

Answer 1

1.

Allocate manufacturing overhead as follows:

Cost allocation
Particulars	Total cost	Allocation base	Standard	Delux
Machining cost	90000	machine hrs	90000 * 24000 / 30000 = 72000	90000 * 6000 / 30000 = 18000
set up cost	60000	production run	60000 * 7 / 19 = 22105.26	60000 * 12 / 19 = 37894.74
inspection cost	60000	no of inspections	60000 * 7 * 2 / 38 = 22105.26	60000 * 12 * 2 / 38 = 37894.74
Total manufacturing overheads			116210.52	93789.48

Compare total per unit cost as follows:2.

Cost per unit
Particulars	Standard	Delux	Total
Direct materials	135000	45000	180000
Direct labor	105000	30000	135000
Manufacturing overhead	116210.52	93789.48	210000
Total cost	356210.52	168789.5	525000
No of units	33000	3000	36000
Cost per unit	10.79	56.26	67.06

3.

On per unit basis, Standard product appears to be more profitable as its per unit cost is lower than that of Delux.