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 $1,368,000 based on production of 280,000 handheld consoles and 110,000 home consoles. Direct labor and direct materials costs were as follows:

	Handheld			Home			Total
Direct labor	$	1,314,000		$	396,000		$	1,710,000
Materials		800,000			704,000			1,504,000

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	$	600,000		50	10	60
Quality tests performed		544,000		13	19	32
Shipping orders processed		224,000		110	50	160
Total overhead	$	1,368,000

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? (Round "Total cost per unit" to 2 decimal places.)

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? (Do not round intermediate calculations. Round "Total cost per unit" to 2 decimal places.)

Answer 1

a) Calculate total Cost per unit

	Handheld	Home
Number of production runs	600000*50/60 = 500000	100000
Quality tests performed	544000*13/32 = 221000	323000
Shipping order processed	224000/160*110 = 154000	70000
Total overhead	875000	493000
Direct material	800000	704000
Direct labor	1314000	396000
Total Cost	2989000	1593000
Unit	280000	110000
Unit cost	10.68	14.48

b) Calculate total Cost per unit

	Handheld	Home
Total overhead	1368000/1710000*1314000 = 1051200	316800
Direct material	800000	704000
Direct labor	1314000	396000
Total Cost	3165200	1416800
Unit	280000	110000
Unit cost	11.30	12.88