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 $1,394,000 based on production of 320,000 handheld consoles and 111,000 home consoles. Direct labor and direct materials costs were as follows.

	Handheld			Home			Total
Direct labor	$	1,328,500		$	414,000		$	1,742,500
Materials		760,000			676,000			1,436,000

Management has determined that overhead costs are caused by three cost drivers. These drivers and their costs for last year are as follows.

				Activity Level
Cost Driver	Costs Assigned			Handheld	Home	Total
Number of production runs	$	720,000		50	10	60
Quality tests performed		494,000		10	16	26
Shipping orders processed		180,000		100	50	150
Total overhead	$	1,394,000

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?

	Overhead Total Cost per Unit Handheld Home

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?

	Overhead Total Cost per Unit Handheld Home

Answer 1

a) calculate following

	Handheld	Home
Production runs	600000	120000
Quality test performed	190000	304000
Shipping order processed	120000	60000
Total overhead	910000	484000
Direct material	760000	676000
Direct labor	1328500	414000
Total Cost	2998500	1574000
Unit	320000	111000
Cost per unit	9.37	14.18

b) calculate following

	Handheld	Home
Total overhead	1062800	331200
Direct material	760000	676000
Direct labor	1328500	414000
Total Cost	3151300	1421200
Unit	320000	111000
Cost per unit	9.85	12.80