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.

	Handheld			Home			Total
Direct labor	$	1,160,400		$	439,600		$	1,600,000
Materials		750,000			684,000			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.

				Activity Level
Cost Driver	Costs Assigned			Handheld	Home	Total
Number of production runs	$	660,000		40	10	50
Quality tests performed		594,000		12	18	30
Shipping orders processed		186,000		100	50	150
Total overhead	$	1,440,000

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) Total overhead assigned to Handheld Total overhead assigned to Home $ $ 889,600 550,400 Handheld Home Cost driver Cost Driver Quantity Overhead Cost Cost Driver Rate Cost Driver Quantity Overhead Cost Driver assigned Quantity Overhead assigned 50 No. of Production runs Quality tests performed Shipping orders processed Total $ $ $ $ 660,000 594,000 186,000 1,440,000 $ $ $ 13,200 19,800 1,240 40 12 100 150 $528,000 $237,600 $124,000 $889,600 10 18 50 $ $ $ $ 132,000 356,400 62,000 550,400 Note : Cost Driver rate = Overhead cost / Cost driver quantity Overhead assigned = Cost driver quantity alloted * Cost driver rate Total Cost per Unit Materials Direct labour Manufacturing overhead Total Manufacturing cost No. of Units of production Total Cost per unit Handheld $ 750,000 $ 1,160,400 $ 889,600 $ 2,800,000 28000 $ 100.00 $ $ $ $ Home 684,000 439,600 550,400 1,674,000 $ 167.40

b) Total overhead cost Total direct labour cost $ $ 1,440,000 1,600,000 Overhead cost as precentage of direct labour cost = Total overhead cost/Total Direct labour cost *100 =$ 1440000/1600000*100 = 90% Overhead cost assigned = Direct labour cost * Overhead rate Overhead cost assigned to Handheld = $ 1160400 +90% = $ 1,044,360 Overhead cost assigned to Home = $ 439600*90% = $ 395,640 Total Cost per Unit Materials Direct labour Manufacturing overhead Total Manufacturing cost No. of Units of production Total Cost per unit Handheld $ 750,000 $ 1,160,400 $ 1,044,360 $ 2,954,760 28000 $ 105.53 $ $ $ $ Home 684,000 439,600 395,640 1,519,240 10000 151.92 $