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 $1,249,000 based on production of 330,000 handheld consoles and 84,000 home consoles. Direct labor and direct materials costs were as follows. Direct labor Materials Handheld $1,158,250 740,000 Home $403,000 678,000 Total $1,561,250 1,418,000 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 Costs Assigned $ 500,000 589,000 160,000 $1,249,000 Activity Level Handheld Home 40 12 50 10 19 Total 50 31 160 110 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

Please find below table useful to compute desired results: -

А B 1 Manufacturing Overhead 2 3 Production 4 Direct Labor 5 Materials 6 7 Cost Driver 8 Number of production runs 9 Quality tests performed 10 Shipping orders processed 11 Total overhead 1249000 Handheld Consoles Home Consoles Total 330000 84000 1158250 403000 =B4+C4 740000 678000 =B5+C5 Activity Level Costs Assigned Handheld Home 500000 40 589000 160000 110 =SUMB8:B10) 10 Total =C8+D8 =C9+D9 =C10+D10 12 12 =B9 13 14 Cost driver 15 Number of production runs 16 Quality test performed 17 Shipping orders processed 18 Total 19 20 21 Activity cost pool 22 Number of production runs 23 Quality test performed 24 Shipping orders processed 25 Total Overhead cost assigned Computation of Activity rates Cost assigned Total activity level Activity rate =B8 =E8 =B15/C15 =E9 =B16/C16 =B10 =E10 =B177C17 =SUMB15-B17) Computation of Overhead assigned to products Handheld Home Activity level used Activity rate Cost assigned Activity level used Activity rate Cost assigned =B22*C22 =D15 =E22*F22 =C9 I=D16 =B23*C23 =D16 =E23*F23 =C10 =D17 =B24*C24 =D10 =D17 =E24*F24 =SUM(D22:D24) =SUM(G22:G24) =C8 =D15 -D8 =D9

27 Computation of Total Cost per unit 28 Handheld Home 29 Direct labor =B4 =C4 30 Materials =B5 =C5 31 Overhead Costs =D25 =G25 32 Total Costs =SUM(B29:B31) =SUM(C29:C31) 33 No. of units =B3 =C3 34 Cost per unit =B32/B33 =C32/C33 35 36 Overhead allocated to Handheld =B1/D4*B4 37 Overhead allocated to Home =B11/D4*C4 38 39 Computation of Total Cost per unit Handheld 41 Direct Labor =B4 =C4 42 Materials =B5 =C5 43 Overhead Costs =B36 =B37 44 Total Costs =SUM(B41-B43) =SUM(C41:C43) 45 No. of Units =B3 =C3 46 Cost per unit =B44/B45 =C44/C45 Home

End results would be as follows: -

C D A 1 Manufacturing Overhead 2 B 1.249.000 Handheld Consoles 330.000 1,158,250 740,000 3 Production 4 Direct Labor 5 Materials 6 Home Consoles Total 84.000 403,000 1.561.250 678.000 1.418.000 Activity Level Handheld Home Total 10 12 19 11050 40 7 Cost Driver 8 Number of production runs 9 Quality tests performed 10 Shipping orders processed 11 Total overhead Costs Assigned 500,000 589,000 160,000 1.249.000 160 12 13 14 Cost driver 15 Number of production runs 16 Quality test performed 17 Shipping orders processed 18 Total 31 19 20 Computation of Activity rates Cost assigned Total activity level Activity rate 500.000 50 10,000 589,000 19.000 160,000 160 1,000 1,249,000 Computation of Overhead assigned to product Handheld Activity level used Activity rate Cost assigned Activity level used 10,000 400.000 19.000 228.000 19 110 1,000 110.000 50 738,000 40 10 21 Activity cost pool 22 Number of production runs 23 Quality test performed 24 Shipping orders processed 25 Total Overhead cost assigned Home Activity rate 10,000 19,000 1,000 12 Cost assigned 100.000 361.000 50,000 511,000

Home 28 29 Direct labor 30 Materials 31 Overhead Costs 32 Total Costs 33 No. of units 34 Cost per unit Computation of Total Cost per unit Handheld 1,158,250 740,000 738.000 2,636,250 330,000 7.99 403,000 678,000 511,000 1.592.000 84.000 18.95 35 36 Overhead allocated to Handheld Overhead allocated to Home 37 926,600 322,400 38 40 Home 41 Direct Labor 42 Materials 43 Overhead Costs 44 Total Costs 45 No. of Units 46 Cost per unit Computation of Total Cost per unit Handheld 1,158,250 740,000 926,600 2,824,850 330,000 8.56 403.000 678,000 322.400 1,403,400 84.000 16.71