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 $1,440,000 based on production of 28,000 handheld consoles and 10,000 home consoles. Direct labor and direct materials costs were as follows: Handheld Home Total Direct labor $ 1,160,400 $ 439,600 $ 1,600,000 Materials 750,000 684,000 1,434,000 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 $ 660,000 40 10 50 Quality tests performed 594,000 12 18 30 Shipping orders processed 186,000 100 50 150 Total overhead $ 1,440,000

Explanation / Answer

computation of cost per consoles of two products i.e, Handheld and Home based on ABC analysis:

Step-1: Allocation of overhead cost to the two products:

Step-2: calculation of total cost and cost per unit based on ABC analysis:

Activity overhead cost cost driver cost driver per unit Allocation of cost Handheld Home Total Number of production runs 660,000 50 660,000/50 = 13,200 13,200*40 = 528,000 13,200*10 = 132,000 Quality tests performed 594,000 30 594,000/30 = 19,800 19,800*12 = 237,600 19,800*18 = 356,400 Shipping orders processed 186,000 150 186,000/150 = 1,240 1,240*100 = 124,000 1,240*50 = 62,000 Total cost 1,440,000 889,600 550,400

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