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 $1,479,000 based on the production of 330,000 handheld consoles and 101,000 home consoles. Direct labor and direct materials costs were as follows.

Handheld

	Handheld	Home	Total
Direct labor	1,464,750	384,000	1,848,750
Materials	720,000	708,000	1,425,000

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	Cost Assigned	Handheld	Home	Total
Number of production runs	$ 600,000	35	15	50
Quality test performed	627,000	13	20	33
Shipping orders processed	252,000	120	60	180

Total overhead

$ 1,479,000

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) Overhead assigned to each production

	Handheld	Home
Number of production runs	420000	180000
Quality test	247000	380000
Shipping order	168000	84000
Total overhead	835000	644000

b) Total cost per unit

	Handheld	Home
Direct labor	1464750	384000
Direct material	720000	708000
Overhead	835000	644000
Total	3019750	1736000
Unit	330000	101000
Total cost per unit	9.15	17.19

2a) Overhead assigned to each production

	Handheld	Home
Total overhead	1171800	307200

b) Total cost per unit

	Handheld	Home
Direct labor	1464750	384000
Direct material	720000	708000
Overhead	1171800	307200
Total	3356550	1399200
Unit	330000	101000
Total cost per unit	10.17	13.85