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 $1,350,000 based on production of 340,000 handheld consoles and 88,000 home consoles. Direct labor and direct materials costs were as follows.

	Handheld			Home			Total
Direct labor	$	1,283,500		$	404,000		$	1,687,500
Materials		730,000			681,000			1,411,000

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	$	600,000		35	15	50
Quality tests performed		540,000		10	17	27
Shipping orders processed		210,000		100	50	150
Total overhead	$	1,350,000

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?

Complete this question by entering your answers in the tabs below.

• Required A
• Required B

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? (Round "Total Cost per Unit" to 2 decimal places.)

	Overhead	Total Cost per Unit
Handheld
Home

	Overhead	Total Cost per Unit
Handheld
Home

Answer 1

1) Overhead cost and total Cost per unit

	Handheld	Home
Number of production runs	600000/50*35 = 420000	180000
Quality tests performed	540000/27*10 = 200000	340000
Shipping orders processed	210000/150*100 = 140000	70000
Total overhead	760000	590000
Direct material	730000	681000
Direct labor	1283500	404000
Total Cost	2773500	1675000
Units	340000	88000
Total Cost per unit	8.16	19.03

2) Overhead cost and total Cost per unit

	Handheld	Home
Total overhead	1026800	323200
Direct material	730000	681000
Direct labor	1283500	404000
Total Cost	3040300	1408200
Units	340000	88000
Total Cost per unit	8.94	16.00