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 $1,361,000 based on production of 330,000 handheld consoles and 116,000 home consoles. Direct labor and direct materials costs were as follows.

	Handheld			Home			Total
Direct labor	$	1,310,250		$	391,000		$	1,701,250
Materials		770,000			706,000			1,476,000

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	$	630,000		35	10	45
Quality tests performed		510,000		13	17	30
Shipping orders processed		221,000		110	60	170
Total overhead	$	1,361,000

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) Total overhead cost assigned and total cost per unit

	Handheld	Home
Direct material	770000	706000
Direct labor	1310250	391000
Overhead
No of production runs	490000	140000
Quality test performed	221000	289000
Shipping orders processed	143000	78000
Total Cost	2934250	1604000
Unit	330000	116000
Total Cost per unit	8.89	13.83

b) Total overhead cost assigned and total cost per unit

	Handheld	Home
Direct material	770000	706000
Direct labor	1310250	391000
Overhead	1048200	312800
Total Cost	3128450	1409800
Unit	330000	116000
Total Cost per unit	9.48	12.15