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 $1,400,000 based on production of 340,000 handheld consoles and 83,000 home consoles. Direct labor and direct materials costs were as follows.

	Handheld			Home			Total
Direct labor	$	1,339,000		$	411,000		$	1,750,000
Materials		780,000			666,000			1,446,000

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	$	660,000		45	15	60
Quality tests performed		558,000		11	20	31
Shipping orders processed		182,000		100	40	140
Total overhead	$	1,400,000

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) Overhead allocated

	Handheld	Home
No of production runs	495000	165000
Quality test performed	198000	360000
Shipping order processed	130000	52000
Total Overhead	823000	577000
Direct material	780000	666000
Direct labor	1339000	411000
Total Cost	2942000	1654000
Unit	340000	83000
Unit cost	8.65	19.93

b) Overhead allocated

	Handheld	Home
Total Overhead	1071200	328800
Direct material	780000	666000
Direct labor	1339000	411000
Total Cost	3190200	1405800
Unit	340000	83000
Unit cost	9.38	16.94