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 $1,472,000 based on production of 350,000 handheld consoles and 108,000 home consoles. Direct labor and direct materials costs were as follows.

	Handheld			Home			Total
Direct labor	$	1,434,000		$	406,000		$	1,840,000
Materials		750,000			658,000			1,408,000

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	$	720,000		45	15	60
Quality tests performed		560,000		11	17	28
Shipping orders processed		192,000		120	40	160
Total overhead	$	1,472,000

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 allocated overhead and unit product cost

	Handheld	Home
Production runs	540000	180000
Quality test	220000	340000
Shipping orders	144000	48000
Total overhead	904000	568000
Direct labor	1434000	406000
Direct material	750000	658000
Total Cost	3088000	1632000
Unit	350000	108000
Unit product cost	8.82	15.11

b) calculate allocated overhead and unit product cost

	Handheld	Home
Total overhead	1147200	324800
Direct labor	1434000	406000
Direct material	750000	658000
Total Cost	3331200	1388800
Unit	350000	108000
Unit product cost	9.52	12.86