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 $1,410,000 based on production of 290,000 handheld consoles and 115,000 home consoles. Direct labor and direct materials costs were as follows.

	Handheld			Home			Total
Direct labor	$	1,375,500		$	387,000		$	1,762,500
Materials		790,000			691,000			1,481,000

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	$	660,000		45	10	55
Quality tests performed		570,000		11	19	30
Shipping orders processed		180,000		110	40	150
Total overhead	$	1,410,000

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?

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

a) Calculate following

	Handheld	Home
Number of production runs	660000/55*45 = 540000	120000
Quality tests performed	570000/30*11 = 209000	361000
Shipping order processed	180000/150*110 = 132000	48000
Total overhead	881000	529000
Direct labor	1375500	387000
Material	790000	691000
Total Cost	3046500	1607000
Unit	290000	115000
Unit cost	10.51	13.97

b) Calculate following

	Handheld	Home
Total overhead	1100400	309600
Direct labor	1375500	387000
Material	790000	691000
Total Cost	3265900	1387600
Unit	290000	115000
Unit cost	11.26	12.07