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 $1,186,000 based on production of 320,000 handheld consoles and 96,000 home consoles. Direct labor and direct materials costs were as follows.

	Handheld			Home			Total
Direct labor	$	1,098,500		$	384,000		$	1,482,500
Materials		700,000			676,000			1,376,000

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	$	450,000		35	10	45
Quality tests performed		580,000		12	17	29
Shipping orders processed		156,000		90	40	130
Total overhead	$	1,186,000

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 total overhead and total Cost per unit

	Handheld	Home
Production runs	350000	100000
Quality test	240000	340000
Shipping orders	108000	48000
Total overhead	698000	488000
Labor	1098500	384000
Direct material	700000	676000
Total Cost	2496500	1548000
Unit	320000	96000
Unit product cost	7.80	16.13

b) Calculate total overhead and total Cost per unit

	Handheld	Home
overhead	878800	307200
Labor	1098500	384000
Direct material	700000	676000
Total Cost	2677300	1367200
Unit	320000	96000
Unit product cost	8.37	14.24