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 probiem. 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 $1.337,000 based on production of 310,000 handheld consoles and 95,000 home consoles. Direct labor and direct materials costs were as follows. Handheld $1,262,250 $409,000 780,000 Total $1,671,250 1,476,000 Home Direct labor Materials 696,000 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 Munber of production runa Quality tests pertorned Shipping orders processed Handheld Bome Costa Assigned $ 660,000 $27,000 150,000 $1,337,000 Total 55 31 45 13 10 18 50 100 150 Total overhesd Required: a. How much overhead will be assigned to each product if these three cost drivers are used to allocate overhead? Whet 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 totalcost produced for each product?
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 probiem. 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 $1.337,000 based on production of 310,000 handheld consoles and 95,000 home consoles. Direct labor and direct materials costs were as follows. Handheld $1,262,250 $409,000 780,000 Total $1,671,250 1,476,000 Home Direct labor Materials 696,000 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 Munber of production runa Quality tests pertorned Shipping orders processed Handheld Bome Costa Assigned $ 660,000 $27,000 150,000 $1,337,000 Total 55 31 45 13 10 18 50 100 150 Total overhesd Required: a. How much overhead will be assigned to each product if these three cost drivers are used to allocate overhead? Whet 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 totalcost produced for each product?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text: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
$1.337,000 based on production of 310,.000 handheld consoles and 95,000 home consoles. Direct labor and direct materials costs
were as follows.
Handheld
Home
$409,000
696,000
Total
$1,671,250
1,476,000
Direct labor
$1,262,250
780,000
Materials
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
Mumber of production runa
Quality testa perforned
Shipping orders processed
Activity Lavel
Handheld
Home
45
Costa Assigned
$660,000
Total
10
55
527,000
150,000
13
18
31
100
50
150
Total overhead
$1,337,000
Required:
a. How much overhead will be assigned to each product if these three cost drivers are used to allocate overhead? Whaot 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 pler unit
produced for each product?
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