Question

Munoz Sporting Equipment manufactures baseball bats and tennis rackets. Department B produces the 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 150 percent of direct labor cost. Last year, revenue, materials, and direct labor were as follows.

	Baseball Bats			Tennis Rackets
Sales revenue	$	1,460,000		$	950,000
Direct labor		300,000			150,000
Direct materials		557,000			281,000

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 100 percent of direct labor cost and Department T would have had a rate of 250 percent of direct labor cost. Recompute the profits for each product using each department’s allocation rate (based on direct labor cost).

Profit Baseball Tennis Bats Rackets a. b. Using plantwide allocation Using department's allocation rate

Answer 1

Solution a:

Computation of Profit Using Plantwide Allocation
	Baseball Bats	Tennis Rackets
Sales Revenue	$14,60,000	$9,50,000
Less: Costs:
Direct Materials	$5,57,000	$2,81,000
Direct labor	$3,00,000	$1,50,000
Overhead Costs (150% of Direct labor)	$4,50,000	$2,25,000
Profits	$1,53,000	$2,94,000

Solution b:

Computation of Profit Using Department's Allocation Rate
	Baseball Bats	Tennis Rackets
Sales Revenue	$14,60,000	$9,50,000
Less: Costs:
Direct Materials	$5,57,000	$2,81,000
Direct labor	$3,00,000	$1,50,000
Overhead Costs (100%/250% of Direct labor)	$3,00,000	$3,75,000
Profits	$3,03,000	$1,44,000