Maglie Company manufactures two video game consoles: handheld and home. The hand

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 $1,169,000 based on production of 340,000 handheld consoles and 109,000 home consoles. Direct labor and direct materials costs were as follows: Total Handheld $1,070,250 S 391,000 $1,461,250 Home Direct labor Materials 790,000 707,000 1,497,000 Management has determined that overhead costs are caused by three cost drivers. These drivers and their costs for last year are as follows: Level Cost Driver Number of production runs Quality tests performed Shipping orders processed Total overhead Costs Assigned Handheld Home 18 50 Total $ 495,000 504,000 170,000 $1,169,000 45 28 170 40 120 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? (Round "Total cost per unit" to 2 decimal places.) Overhead Total Cost per Unit Handheld Home 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? (Do not round intermediate calculations. Round "Total cost per unit" to 2 decimal places.) Overhead Total Cost per Unit Handheld Home

Explanation / Answer

1) overhead rate based on activities Cost Driver number of production runs 495000/45 11000 quality tests performed 504000/28 18000 shipping orders processed 170000/170 1000 overhead allocated handheld home total number of production runs 440000 55000 495000 quality tests performed 180000 324000 504000 shipping orders processed 120000 50000 170000 total 740000 429000 1169000 cost per unit handheld home Direct labor 1,070,250 391,000 materials 790,000 707,000 overhead allocated 740,000 429,000 total cost 2,600,250 1,527,000 div by units produced 340,000 109,000 cost per unit 7.65 14.01 overhead cost per unit handheld 740000 7.65 home 429000 14.01 2) overhead rate = 1,169,000/1,461,250 0.8 handheld home Direct labor 1,070,250 391,000 materials 790,000 707,000 overhead allocated 856,200 312,800 total cost 2,716,450 1,410,800 div by units produced 340,000 109,000 cost per unit 7.99 12.94 overhead cost per unit handheld 856,200 7.99 home 312,800 12.94

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