Question

Perez Electronics produces video games in three market categories: commercial, home, and miniature. Perez has traditionally allocated overhead costs to the three products using the companywide allocation base of direct labor hours. The company recently implemented an ABC system when it installed computer-controlled assembly stations that rendered the traditional costing system ineffective. In implementing the ABC system, the company identified the following activity cost pools and cost drivers:

    

Category		Total Pooled Cost			Types of Costs	Cost Driver
Unit		$	613,200		Indirect labor wages, supplies, factory utilities, machine maintenance	Machine hours
Batch			769,600		Materials handling, inventory storage, labor for setups,packaging, labeling and shipping, scheduling	Number of production orders
Product			210,200		Research and development	Time spent by research department
Facility			459,000		Rent, general utilities, maintenance, facility depreciation, admin. salaries	Square footage

     
Additional data for each of the product lines follow:     

	Commercial				Home				Miniature				Total
Direct materials cost	$	37.00	/unit		$	24.40	/unit		$	30.40	/unit			—
Direct labor cost	$	14.40	/hour		$	14.40	/hour		$	17.30	/hour			—
Number of labor hours		5,900				11,100				2,000				19,000
Number of machine hours		14,000				46,000				13,000				73,000
Number of production orders		250				2,000				850				3,100
Research and development time		14	%			21	%			65	%			100	%
Number of units		16,000				46,000				15,000				77,000
Square footage		21,000				50,000				19,000				90,000

    
Required

1. Determine the total cost and cost per unit for each product line, assuming that overhead costs are allocated to each product line using direct labor hours as a companywide allocation base. Also determine the combined cost of all three product lines.

2. Determine the total cost and cost per unit for each product line, assuming that an ABC system is used to allocate overhead costs. Determine the combined cost of all three product lines.

(For all requirements, round intermediate calculations for allocation rates to 2 decimal places and all other calculations to the nearest whole dollar. Round "Cost per Unit" to 2 decimal places. Round your answers for "Total Cost" to the nearest whole dollar amount.)

Answer 1

	Commercial	Home	Miniature	Total
Direct materials cost per unit	$             37.00	$                 24.40	$                30.40
Multiply: number of units	16,000	46,000	15,000
Direct materials cost	$        592,000	$        1,122,400	$            456,000
Direct labor cost per unit	$             14.40	$                 14.40	$                17.30
Multiply: number of labor hours	5,900	11,100	2,000
Direct labor cost	$           84,960	$            159,840	$              34,600
Category				Total Pooled Cost
Unit				$       613,200
Batch				$       769,600
Product				$       210,200
Facility				$       459,000
Total overhead cost				$    2,052,000
Divided by: direct labor hour				19,000
Overhead rate				$                108
	Commercial	Home	Miniature	Total
Labor hours	5,900	11,100	2,000
Multiply: Overhead rate	$                 108	$                    108	$                    108
Allocated overhead	$        637,200	$        1,198,800	$            216,000
Direct materials cost	$        592,000	$        1,122,400	$            456,000
Direct labor cost	$           84,960	$            159,840	$              34,600
Allocated overhead	$        637,200	$        1,198,800	$            216,000
Total Cost	$     1,314,160	$        2,481,040	$            706,600
Total Cost	$     1,314,160	$        2,481,040	$            706,600
Divided by: number of units	16,000	46,000	15,000
Cost per unit	$             82.14	$                 53.94	$                47.11
Determine the combined cost of all three product lines
Commercial				$    1,314,160
Home				$    2,481,040
Miniature				$       706,600
Combined cost of all three product lines				$    4,501,800

Part B (ABC system is used to allocate overhead costs.)

Category	Total Pooled Cost	Divided: Total activity		Activity rate
Unit	$        613,200	73,000	Machine hours	$               8.40
Batch	$        769,600	3,100	Production orders	$          248.26
Product	$        210,200	100%	Research time	$ 210,200.00
Facility	$        459,000	90,000	Square footage	$               5.10
Commercial	Activity rate	Activity rate	Activity rate	Overhead allocated
Unit	$               8.40	14,000	Machine hours	117,600
Batch	$          248.26	250	Production orders	62,065
Product	$ 210,200.00	14%	Research time	29,428
Facility	$               5.10	21,000	Square footage	107,100
Total overhead allocated				316,193
Home	Activity rate	Activity rate	Activity rate	Overhead allocated
Unit	$               8.40	46,000	Machine hours	386,400
Batch	$          248.26	2,000	Production orders	496,520
Product	$ 210,200.00	21%	Research time	44,142
Facility	$               5.10	50,000	Square footage	255,000
Total overhead allocated				1,182,062
Miniature	Activity rate	Activity rate	Activity rate	Overhead allocated
Unit	$               8.40	13,000	Machine hours	109,200
Batch	$          248.26	850	Production orders	211,021
Product	$ 210,200.00	65%	Research time	136,630
Facility	$               5.10	19,000	Square footage	96,900
Total overhead allocated				553,751
	Commercial	Home	Miniature	Total
Direct materials cost	$        592,000	$        1,122,400	$        456,000
Direct labor cost	$          84,960	$            159,840	$          34,600
Allocated overhead	$        316,193	$        1,182,062	$        553,751
Total Cost	$        993,153	$        2,464,302	$    1,044,351
Total Cost	$        993,153	$        2,464,302	$    1,044,351
Divided by: number of units	16,000	46,000	15,000
Cost per unit	$             62.07	$                53.57	$            69.62
Determine the combined cost of all three product lines
Commercial				$        993,153
Home				$    2,464,302
Miniature				$    1,044,351
Combined cost of all three product lines				$    4,501,806
Excess $6 (4501806-4501800) arise due to rounding of activity rate.