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 $1,070,000 based on production of 320,000 handheld consoles and 82,000 home consoles. Direct labor and direct materials costs were as follows. Direct labor Materials Handheld $957,500 740,000 Home $380,000 694,000 Total $1,337,500 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 Activity Level Costs Assigned Handheld Home Total $ 350,000 30 5 35 580,000 12 1729 140,000 80 60 140 $1,070,000 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? Complete this question by entering your answers in the tabs below. Required A Required B How much overhead will ho accioned to each nroduct if thaca three cnct drivers are uced to allocate overhead? What is the

Answer 1

Maglie Company Requirement a Rate Handheld Home 957500 380000 740000 694000 Total 1337500 1434000 Direct Labour Direct Materials Overhead Costs Prodn. Runs Quality Tests Ship Orders Total Overhead Total Costs Number of units Total Unit Cost 10000 20000 1000 300000 240000 80000 620000 2317500 320000 7.24 50000 350000 340000 580000 60000 140000 450000 1070000 1524000 3841500 82000 5275500 18.59 Number of Production runs = 350000/ 35 = $10000 per run Quality Tests = $580000 / 29 = $20000 Shipping Orders = $140000 / 140 = $1000 Requirement b Rate 80% Direct Labour Direct Materials Total Overhead Total Costs Number of units Total Unit Cost Handheld Home Total 957500 380000 1337500 740000 694000 1434000 766000 304000 1070000 2463500 1378000 3841500 320000 820003841500 7.70 16.80 Overhead rate = 1070000 / 1337500 = 80% 957500 x 80% = 766000