Rodent Corporation produces two types of computer mice, wired and wireless. The
ID: 2642370 • Letter: R
Question
Rodent Corporation produces two types of computer mice, wired and wireless. The wired mice are designed as low-cost, reliable input devices. The company only recently began producing the higher-quality wireless 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 $360,000 based on production of 140,000 wired mice and 50,000 wireless mice. Direct labor and direct materials costs were as follows:
Management has determined that overhead costs are caused by three cost drivers. These drivers and their costs for last year are as follows:
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
Wired $______________ $__________________
Wireless $______________ $__________________
(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? (Round "Total Cost Per Unit" to 2 decimal places.)
Overhead Total Cost Per Unit
Wired $_____________ $________________
Wireless $_____________ $________________
Wired Wireless Total Direct labor $ 290,100 $ 109,900 $ 400,000 Materials 187,500 171,000 358,500Explanation / Answer
Part a:
Step 1: Calculate Activity Level Rate for Each Activity
The formula for Activity Level Rate is:
Activity Level Rate = Costs Assigned/Cost Driver
______________
Number of Production Runs = 165,000/25 = $6,600
Quality Tests Performed = 148,500/15 = $9,900
Shipping Orders Processed = 46,500/75 = $620
____________________________________________
Step 2: Calculate Overhead Allocated to Products
Formula for Calculating Overhead Allocated for a Particular Cost Drives = Total Costs Assigned*Activity Rate for the particular cost level (as calculated in step 1)
________________________
____________________________________________
Step 3: Calculate Total Cost Per Unit
Formula for Calculating Total Cost Per Unit = Total Costs/Units Manufactured (Total Costs Comprise of Direct Material, Direct Labor and Overheads)
_____________
Answers in a Tabular Format
________________________________________________________________________________________
Part b:
Step 1: Calculate Total Overhead
If direct labor cost is used to allocate the cost, you need to calculate the predetermined overhead rate. The formula is
Predetermined Overhead Rate = Total Manufacturing Overhead/Total Direct Labor Cost
Predetermined Overhead Rate = $360,000/$400,000 = $.90
_____________
Total Overhead for Wired = Direct Labor Cost for Wired*Predetermined overhead rate = $290,100*.90 = $261,090
Total Overhead for Wireless = Direct Labor Cost for Wireless*Predetermined overhead rate = $109,900*.90 = $98,910
____________________________________________
Step 2: Calculate Total Cost Per Unit
Formula for Calculating Total Cost Per Unit = Total Costs/Units Manufactured (Total Costs Comprise of Direct Material, Direct Labor and Overheads)
_____________
Answers in a Tabular Format
Wired Number of production runs (20*6,600) 132,000 Quality tests performed (6*9,900) 59,400 Shipping orders processed (50*620) 31,000 Total Overhead $222,400Related Questions
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