Question

Munoz Electronics produces video games in three market categories: commercial, home, and miniature. Munoz 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 Unit Total Pooled Cost $756,800 Cost Driver Machine hours Batch 349,000 Types of Costs Indirect labor wages, supplies, factory utilities, machine maintenance Materials handling, inventory storage, labor for setups, packaging, labeling and shipping, scheduling Research and development Rent, general utilities, maintenance, facility depreciation, admin. salaries Number of production orders Product Facility 211,200 478,500 Time spent by research department Square footage Additional data for each of the product lines follow: Total Direct materials cost Direct labor cost Number of labor hours Number of machine hours Number of production orders Research and development time Number of units Square footage Commercial $ 35. 30/unit $ 14.10/hour 6,100 14,000 220 15% 12,000 18,000 Home $ 25.00/unit $ 14.10/hour 11,100 42,000 2,100 24% 40,000 50,000 Miniature $ 31.10/unit $ 17.40/hour 1,700 30,000 480 61% 11,000 19,000 18,900 86,000 2,800 100% 63,000 87,000 Required a. 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. b. 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.

Answer 1

a)

Particulars			Commercial	Workings	Home	Workings	Miniature	Workings	Total
Direct Material			$    423,600.00	($ 35.3 x 12000)	$ 1,000,000.00	($ 25 x 40000)	$ 342,100.00	($ 31.1 x 11000)
Direct Labor			$      86,010.00	($ 14.1 x 6100)	$    156,510.00	($ 14.1 x 11100)	$   29,580.00	($ 17.4 x 1700)
OH			$    579,500.00	($ 95 x 6100)	$ 1,054,500.00	($ 95 x 11100)	$ 161,500.00	($ 95 x 1700)
Total cost			$ 1,089,110.00		$ 2,211,010.00		$ 533,180.00		$ 3,833,300.00
No. of units			12000		40000		11000		63000
Cost per unit			$              90.76		$              55.28		$           48.47

Workings
Companywide allocation rate =			Total pooled cost of all category / Total no. of DLH
		=	($ 756800 + $ 349000 + $ 211200 + $ 478500) / 18900 hrs
		=	$   95.00	per DLH

b)

Computation of Product cost
Particulars		Rate	Commercial	Workings	Home	Workings	Miniature	Workings
Direct Material			$ 423,600.00	($ 35.3 x 12000)	$ 1,000,000.00	($ 25 x 40000)	$ 342,100.00	($ 31.1 x 11000)
Direct Labor			$   86,010.00	($ 14.1 x 6100)	$     156,510.00	($ 14.1 x 11100)	$   29,580.00	($ 17.4 x 1700)
OH			$ 281,301.43		$     957,038.00		$ 557,160.57
Total cost			$ 790,911.43		$ 2,113,548.00		$ 928,840.57		$ 3,833,300.00
No. of units			12000		40000		11000		63000
Cost per unit			$           65.91		$               52.84		$           84.44		$               60.85

Workings:

Category	Pooled cost	Total Volume		Rate
Unit	756800	86000	MHs	$             8.80
Batch	349000	2800	orders	$        124.64
Product	211200	100	time	$     2,112.00
Facility	478500	87000	footage	$             5.50

Allocation of OH
Particulars		Rate	Commercial	Workings	Home	Workings	Miniature	Workings
Unit		$         8.80	$ 123,200.00	(14000 x $ 8.8)	$     369,600.00	(42000 x $ 8.8)	$ 264,000.00	(30000 x $ 8.8)
Batch		$    124.64	$   27,421.43	(220 x $ 124.64)	$     261,750.00	(2100 x $ 124.64)	$   59,828.57	(480 x $ 124.64)
Product		$ 2,112.00	$   31,680.00	(15 x $ 2112)	$       50,688.00	(24 x $ 2112)	$ 128,832.00	(61 x $ 2112)
Facility		$         5.50	$   99,000.00	(18000 x $ 5.5)	$     275,000.00	(50000 x $ 5.5)	$ 104,500.00	(19000 x $ 5.5)
			$ 281,301.43		$     957,038.00		$ 557,160.57