Question

Doaktown Products manufactures fishing equipment for recreational uses. The Miramichi plant produces the company’s two versions of a special reel used for river fishing. The two models are the M-008, a basic reel, and the M-123, a new and improved version. Cost accountants at company headquarters have prepared costs for the two reels for the most recent period. The plant manager is concerned. The cost report does not coincide with her intuition about the relative costs of the two models. She has asked you to review the cost accounting and help her prepare a response to headquarters.

Manufacturing overhead is currently assigned to products based on their direct labor costs. For the most recent month, manufacturing overhead was $306,400. During that time, the company produced 13,400 units of the M-008 and 2,300 units of the M-123. The direct costs of production were as follows.

	M-008		M-123		Total
Direct materials	$	107,200	$	92,000	$	199,200
Direct labor		107,200		46,000		153,200

Management determined that overhead costs are caused by three cost drivers. These drivers and their costs for last year were as follows.

			Activity Level
Cost Driver		Costs		M-008		M-123		Total
Number of machine-hours	$	130,900		1,000		9,000		10,000
Number of production runs		80,000		10		30		40
Number of inspections		95,500		10		40		50
Total overhead	$	306,400

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 of the 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 cost assigned and total Cost per unit

	M-008	M-123
NO of machine hour	130900/10000*1000 = 13090	117810
Number of production runs	80000*10/40 = 20000	60000
Number of inspection	95500/50*10 = 19100	76400
Total overhead	52190	254210
Direct material	107200	92000
Direct labor	107200	46000
Total Cost	266590	392210
Unit	13400	2300
Overhead cost per unit	19.89	170.53

b) Overhead cost assigned and total Cost per unit

	M-008	M-123
Total overhead	214400	92000
Direct material	107200	92000
Direct labor	107200	46000
Total Cost	428800	230000
Unit	13400	2300
Overhead cost per unit	32	100