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 $1,440,000 based on production of 28,000 handheld consoles and 10,000 home consoles. Direct labor and direct materials costs were as follows. Direct labor Materials Handheld $1,160,400 750,000 Home $ 439,600 684,000 Total $1,600,000 1,434,000 Management has determined that overhead costs are caused by three cost drivers. These drivers and their costs for last year are as follows. Cost Driver Number of production runs Quality tests performed Shipping orders processed Total overhead Total 50 Activity Level Handheld 40 12 100 Costs Assigned $ 660,000 594,000 186,000 $1,440,000 30 150 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

Ans. 1		Handheld	Home
	Direct materials	$750,000	$684,000
	Direct labor	$1,160,400	$439,600
	Overhead assigned	$889,600	$550,400
	Total manufacturing costs	$2,800,000	$1,674,000
	Units (Consoles) produced	28000	10000
	Total cost per unit	$100.00	$167.40
	Total cost per unit   =   Total manufacturing cost / Units produced
Ans. 2		Handheld	Home
	Direct materials	$750,000	$684,000
	Direct labor	$1,160,400	$439,600
	Overhead assigned	$1,044,360	$395,640
	Total manufacturing costs	$2,954,760	$1,519,240
	Units (Consoles) produced	28000	10000
	Total cost per unit	$105.53	$151.92
	Total cost per unit   =   Total manufacturing cost / Units produced