Question

Doaktown Products manufactures fishing equipment for recreational uses. The Miramichi plant produces the company’s two versions of a special reel used for river fishing. The two models are the M-008, a basic reel, and the M-123, a new and improved version. Cost accountants at company headquarters have prepared costs for the two reels for the most recent period. The plant manager is concerned. The cost report does not coincide with her intuition about the relative costs of the two models. She has asked you to review the cost accounting and help her prepare a response to headquarters.

Manufacturing overhead is currently assigned to products based on their direct labor costs. For the most recent month, manufacturing overhead was $332,000. During that time, the company produced 14,500 units of the M-008 and 2,500 units of the M-123. The direct costs of production were as follows.

	M-008	M-123	Total
Direct Materials	$116,000	$100,000	$216,000
Direct Labot	$116,000	$50,000	$166,000

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

		Activity Level
Cost Driver	Costs	M-008	M-123	Total
Number of machine-hours	$160,000	1,000	9,000	10,000
Number of production runs	80,000	10	30	40
Number of inspections	91,500	30	20	50
Total overhead	$332,000

Required:

1. 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?
2. How much of the 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

1) Total overhead assigned to each product and total cost per unit produced

	M-008	M-123
Machining	16000	144000
Production runs	20000	60000
Inspection	54900	36600
Total overhead assigned	90900	240600
Direct material	116000	100000
Direct labor	116000	50000
Total product cost	322900	390600
Units	14500	2500
Unit product cost	22.27	156.24

2) Total overhead assigned to each product and total cost per unit produced

	M-008	M-123
overhead assigned	232000	100000
Direct material	116000	100000
Direct labor	116000	50000
Total product cost	464000	250000
Units	14500	2500
Unit product cost	32	100