Exercise 9-43 (Algo) Activity-Based versus Traditional Costing (LO 9-4, 5, 6) 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 $1,212,000 based on production of 350,000 handheld consoles and 110,000 home consoles. Direct labor and direct materials costs were as follows. Handheld Home Total Direct labor $ 1,125,000 $ 390,000 $ 1,515,000 Materials 770,000 708,000 1,478,000 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 $ 550,000 40 10 50 Quality tests performed 493,000 13 16 29 Shipping orders processed 169,000 90 40 130 Total overhead $ 1,212,000 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?
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Exercise 9-43 (Algo) Activity-Based versus Traditional Costing (LO 9-4, 5, 6)
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
| Handheld | Home | Total | |||||||
| Direct labor | $ | 1,125,000 | $ | 390,000 | $ | 1,515,000 | |||
| Materials | 770,000 | 708,000 | 1,478,000 | ||||||
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 | $ | 550,000 | 40 | 10 | 50 | |
| Quality tests performed | 493,000 | 13 | 16 | 29 | ||
| Shipping orders processed | 169,000 | 90 | 40 | 130 | ||
| Total overhead | $ | 1,212,000 | ||||
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?
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