Question

ACCT 2301 Cost Allocation Handout #16 Os company has two production departments in its manufacturing acilities. Home Tools specializes in hond tools for individual home users, and ofessional Tools makes sophisticated tools for professional maintenance Otto's accountant has identified the following annual costs associated with these two products: Facile Salary of vice president of production Salary d e cheme tools Salary Re s to Direct materials cost home tools Direct materials colossional tools Direct labor cosm os Direct labores professionals Direct les coste s Direct uites cosesinatos General factorywide Production salles Pringe benefits Depreciation Nonfinancial data Maching hours, home tools Maching hours, professional tools SI000 54.000 4500 300,000 375.000 335.000 414.000 21.00 1.000 3.500 40.500 150,000 380,000 4,000 2009 Required a. Identify the costs that are the (1) direct costs of Home Tools, (2) direct costs of Professional Tools, and (3) indirect costs using the table below. b. Select the appropriate cost drivers and allocate the indirect costs to home tools and to professional tools. C. Assume that each department makes only a single product. Home Tools produces its Deluxe Drill for home use, and Professional Tools produces the Professional Drill. The company made 30,000 units of Deluxe Drill and 20,000 units of Professional Drill during the year. Determine the total estimated cost of the products made in each department. If Otto prices its products at cost plus 30 percent of cost, what price per unit should it charge for the Deluxe Drill and the Professional Drill? 133

Answer 1

a.Direct costs
1.Home tools
Direct material costs, home tools	300000
Direct labor	338000
Direct utilities cost	75000
Salary of manager, home tools	54000
Total direct costs	767000
2.Professional tools
Direct material costs, professional tools	375000
Direct labor	414000
Direct utilities cost	30000
Salary of manager, professional tools	43500
Total direct costs	862500
3.Indirect costs
Salary of vice president of production	150000
General factorywide utilities	31500
Production supplies	40500
Fringe benefits	150000
Depreciation	360000
Total indirect costs	732000

b.Allocation of indirect costs	Cost driver	Home tools	Professional tools	Total
Salary of vice president of production	Equal	75000	75000	150000
General factorywide utilities	M/c hrs(2:1)	21000	10500	31500
Production supplies	M/c hrs(2:1)	27000	13500	40500
Fringe benefits	Equal	75000	75000	150000
Depreciation	M/c hrs(2:1)	240000	120000	360000
Total		438000	294000	732000
c. Total cost		Home tools	Professional tools	Total
Direct costs		767000	862500	1629500
Indirect costs(allocated)		438000	294000	732000
1.Total costs of the dept.		1205000	1156500	2361500
2.No.of units of Drills made/yr.		30000	20000
Cost/unit(1/2)		40.17	57.83	(Answer)
Add: Mark-up(Cost*30%)		12.05	17.35
Price/ Drill		52.22	75.17	(Answer)