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 $1,440,000 based on production of 28,000 handheld consoles and 10,000 home consoles. Direct labor and direct materials costs were as follows.

	Handheld			Home			Total
Direct labor	$	1,160,400		$	439,600		$	1,600,000
Materials		750,000			684,000			1,434,000

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		40	10	50
Quality tests performed		594,000		12	18	30
Shipping orders processed		186,000		100	50	150
Total overhead	$	1,440,000

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?

Please show explanation

Answer 1

a) Overhead cost assigned

	Handheld	Home
Number of production runs	528000	132000
Quality tests performed	237600	356400
Shipping orders processed	124000	62000
Total overhead assigned	889600	550400
Direct labor	1160400	439600
Direct material	750000	684000
Total product cost	2800000	1674000
Units	28000	10000
Unit product cost	100	167.40

b) Overhead cost assigned

	Handheld	Home
Total overhead assigned	1044360	395640
Direct labor	1160400	439600
Direct material	750000	684000
Total product cost	2954760	1519240
Units	28000	10000
Unit product cost	105.53	151.92