Question

Exercise 9-37 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 $1,381,000 based on production of 340,000 handheld consoles and 96,000 home consoles. Direct labor and direct materials costs were as follows: Handheld Home $395,000 673,000 Total $1,331,250 750,000 Direct labor Materials $1,726,250 1,423,000 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 Cost Driver Number of production runs Quality tests performed Shipping orders processed Home Costs Assigned $ 650,000 544,000 187,000 Total 50 34 170 40 14 10 20 60 110 $1,381,000 Total overhead 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? (Round "Total cost per unit" to 2 decimal places.) Overhead Total Cost per Unit Handheld Home 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? (Do not round intermediate calculations. Round "Total cost per unit" to 2 decimal places.) Total Cost per Unit Overhead Handheld Home

Answer 1

(a)

	Overhead	Total cost per unit
Handheld	$865000	$8.67
Home	$516000	$16.50

	Handheld	Home
No of production runs	($650000 * 40/50) =$520000	($650000 * 10/50) =$130000
Quality tests performed	($544000 * 14/34) =$224000	($544000 * 20/34) =$320000
Shipping cost processed	($187000 * 110/170) =$121000	($187000 * 60/170) =$66000
	$865000	$516000

	Handheld	Home
Material	$750000	$673000
Direct Labor	$1331250	$395000
Overhead	$865000	$516000
Total Cost  (a)	$2946250	$1584000
Units  (b)	340000	96000
Cost per unit  (a/b)	$8.67	$16.50

(b)

	Overhead	Total cost per unit
Handheld	$1065000	$9.25
Home	$316000	$14.42

Handheld = $1381000/$1726250 * $1331250 = $1065000

Home = $1381000/$1726250 * $395000= $316000

	Handheld	Home
Material	$750000	$673000
Direct Labor	$1331250	$395000
Overhead	$1065000	$316000
Total Cost  (a)	$3146250	$1384000
Units  (b)	340000	96000
Cost per unit  (a/b)	$9.25	$14.42