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?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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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 $1,334,000 based on production of 320,000 handheld consoles and 113,000 home consoles. Direct labor and direct materials costs were as follows.

 

 

Handheld

Home

Total

Direct labor

$

1,285,500

 

$

382,000

 

$

1,667,500

 

Materials

 

800,000

 

 

657,000

 

 

1,457,000

 

 

 

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

$

650,000

 

35

15

50

Quality tests performed

 

544,000

 

13

19

32

Shipping orders processed

 

140,000

 

90

50

140

Total overhead

$

1,334,000

 

 

 

 

 

 

Required:

  1. 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?
  2. 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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