Rodent Corporation produces two types of computer mice, wired and wireless. The

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 187,500 171,000 358,500

Explanation / Answer

a)

First we need to calculate cost per unit of activity:

Wired mice

following is the calculation of total overhead cost:

Direct material cost 290100

DIrect labor cost 187500

Overhead cost 222400

Total cost 700,000

Units produced = 140,000

cost per unit = 700,000/140,000 = $5

Wireless mouse

following is the calculation of total overhead cost:

Units produced = 50000

COst per unit = 418500/50000

= $8.37 per unit

b)

here we first need to calculate the allocation proporation of overhead based on direct labor cost

Wired mice

Overhead allocated = 360,000 x 72.53% = 261090

Direct labor = 290100

DIrect material = 187500

TOtal cost = 738690

No. of mice produced = 140000

COst per unit =738690/140000 = $5.28

Wired mice

Overhead allocated = 360,000 x 27.48% = 98910

Direct labor = 109900

DIrect material =   171000

TOtal cost = 379810

No. of units produced = 50000

ost per unit = 379810/50000 = $7.60 per unit

Costs drivers Cost assigned Total activity Cost per unit of activity Production runs 165000 25 6600 quality test 148500 15 9900 Shippining orders 46500 75 620

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