Question

Munoz Sporting Equipment manufactures baseball bats and tennis rackets. Department B produces the baseball bats, and Department T produces the tennis rackets. Munoz currently uses plantwide allocation to allocate its overhead to all products. Direct labor cost is the allocation base. The rate used is 200 percent of direct labor cost. Last year, revenue, materials, and direct labor were as follows:

	Baseball Bats			Tennis Rackets
Sales revenue	$	1,610,000		$	1,150,000
Direct labor		340,000			170,000
Direct materials		566,000			294,000

Required:

a. Compute the profit for each product using plantwide allocation.

b. Maria, the manager of Department T, was convinced that tennis rackets were really more profitable than baseball bats. She asked her colleague in accounting to break down the overhead costs for the two departments. She discovered that had department rates been used, Department B would have had a rate of 150 percent of direct labor cost and Department T would have had a rate of 300 percent of direct labor cost. Recompute the profits for each product using each department’s allocation rate (based on direct labor cost).

Answer 1

a) Computation of the profit of each product using plantwide allocation.
	Baseball Bats	Tennis Rackets
Sales Revenue(a)	$1610000	$1150000
Direct Labour	340000	170000
Direct Material	566000	294000
Overhead 200% of Direct Labour	680000	340000
Total Cost(b)	$1586000	$804000
Profit (a-b)	$24000	$346000
b.) computation of the profit using department's allocation rate
	Baseball Bats	Tennis Rackets
Sales Revenue(a)	$1610000	$1150000
Direct Labour	340000	170000
Direct Material	566000	294000
Overhead(150% ×$340000)(300%*$170000)	510000	510000
Total Cost(b)	$1416000	$974000
Profit(a-b)	$194000	$176000