Asbury Coffee Enterprises (ACE) manufactures two models of coffee grinders: Personal and Commercial. The Personal grinders have a smaller capacity and are less durable than the Commercial grinders. ACE only recently began producing the Commercial model. Since the introduction of the new product, profits have been steadily declining, although sales have been increasing. The management at ACE believes that the problem might be in how the accounting system allocates costs to products. The current system at ACE allocates manufacturing overhead to products based on direct labor costs. For the most recent year, which is representative, manufacturing overhead totaled $2,037,000 based on production of 30,000 Personal grinders and 10,000 Commercial grinders. Direct costs were as follows: Personal Commercial Total Direct materials $ 1,445,000 $ 620,000 $ 2,065,000 Direct labor 1,030,000 667,500 1,697,500 Management has determined that overhead costs are caused by three cost drivers. These drivers and their costs for last year are as follows: Cost Driver Costs Assigned Activity Level Total Personal Commercial Number of production runs $ 975,000 50 25 75 Quality tests performed 820,000 15 25 40 Shipping orders processed 242,000 150 50 200 Total overhead $ 2,037,000 Required: 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? 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?
Asbury Coffee Enterprises (ACE) manufactures two models of coffee grinders: Personal and Commercial. The Personal grinders have a smaller capacity and are less durable than the Commercial grinders. ACE only recently began producing the Commercial model. Since the introduction of the new product, profits have been steadily declining, although sales have been increasing. The management at ACE believes that the problem might be in how the accounting system allocates costs to products.
The current system at ACE allocates manufacturing
| Personal | Commercial | Total | |
|---|---|---|---|
| Direct materials | $ 1,445,000 | $ 620,000 | $ 2,065,000 |
| Direct labor | 1,030,000 | 667,500 | 1,697,500 |
Management has determined that overhead costs are caused by three cost drivers. These drivers and their costs for last year are as follows:
| Cost Driver | Costs Assigned | Activity Level | Total | |
|---|---|---|---|---|
| Personal | Commercial | |||
| Number of production runs | $ 975,000 | 50 | 25 | 75 |
| Quality tests performed | 820,000 | 15 | 25 | 40 |
| Shipping orders processed | 242,000 | 150 | 50 | 200 |
| Total overhead | $ 2,037,000 |
Required:
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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?
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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?
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