Question

Munoz Sporting Equipment manufactures baseball bats and tennis rackets. Department B produces baseball bats, and Department T produces the tennis rackets. Munoz currently uses plantwide allocation to allocate its overhead to all products. Direct labor cost is the allocation base. The rate used is 200 percent of direct labor costs. Last year, revenue, materials, and direct labor were as follows:

	Baseball Bats	Tennis Rackets
Sales Revenue	$2,700,000	$1,800,000
Direct Labor	500,000	250,000
Direct Materials	1,100,000	550,000

Required

a. Compute the profit for each product using plantwide allocation.
b. Maria, the manager of Department T, was convinced that tennis rackets were really more profitable than baseball bats. She asked her colleague in accounting to break down the overhead costs for the two departments. She discovered that had department rates been used, Department B would have had a rate of 150 percent of direct labor cost and Department T would have had a rate of 300 percent of direct labor cost. Re-compute the profits for each product using each department’s allocation rate (based on direct labor cost).
c. Why are the results different in requirements (a) and (b)?

Answer 1

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Part a
	Baseball Bats	Tennis Rackets
Sales Revenue	$             2,700,000	$               1,800,000
Less: Cost
Direct Labor	$                 500,000	$                   250,000
Direct Materials	$             1,100,000	$                   550,000
Overheads (200% of Direct Labor Cost)	$             1,000,000	$                   500,000
Profit	$                 100,000	$                   500,000
Part b
	Baseball Bats	Tennis Rackets
Sales Revenue	$             2,700,000	$               1,800,000
Less: Cost
Direct Labor	$                 500,000	$                   250,000
Direct Materials	$             1,100,000	$                   550,000
Overheads (150% and 300%)	$                 750,000	$                   750,000
Profit	$                 350,000	$                   250,000
Part c
Results are different due to change in allocation of overhead cost from plant wide allocation
to department wise allocation.