9-37 (LO 9-4, 5, 6) Maglie Company manufactures two video game consoles: handhel
ID: 2567918 • Letter: 9
Question
9-37 (LO 9-4, 5, 6)
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:
Management has determined that overhead costs are caused by three cost drivers. These drivers and their costs for last year are as follows:
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?
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?
c. How might the results from using activity-based costing in requirement (a) help management understand Maglie's declining profits?
Description Handheld Home Total Direct labor $1,160,400 $439,600 $1,600,000 Materials $750,000 $684,000 $1,434,000Explanation / Answer
Step-1: Allocation of overhead cost to the two products:
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 x 40 = 528,000
13,200 x 10 = 132,000
Quality tests performed
594,000
30
594,000/30 = 19,800
19,800 x 12 = 237,600
19,800 x 18 = 356,400
Shipping orders processed
186,000
150
186,000/150 = 1,240
1,240 x 100 = 124,000
1,240 x50 = 62,000
Total cost
1,440,000
889,600
550,400
Step-2: calculation of total cost and cost per unit based on ABC analysis:
Handheld
Home
Direct labor
1,160,400
439,600
Direct material
750,000
684,000
Manufacturing overhead cost
889,600
550,400
Total cost = a
2,800,000
1,674,000
Units produced = b
28,000
10,000
Cost per unit = a/b
100
167.4
a. Statement of cost pool
Cost driver
Amount $
No. of activity
Cost per pactivity $
Number of production runs
660000
50
13200
Quality tests performed
594000
30
19800
Shipping orders processed
186000
150
1240
Statement of cost:
Cost
Handheld $
Home $
Overheads:
On the basis of number of production runs
13200x40=528000
13200x10=132000
On the basis of quality tests performed
19800x12=237600
19800x18=356400
On the basis of shipping orders processed
1240x100=124000
1240x50=62000
Total overheads
889600
550400
Materials
750000
684000
Labor
1160400
439600
Total costs
$2800000
$1674000
No. of units
28000
10000
Total cost per unit
$100
$167.40
b. Overhead allocation rate = Total overheads / Total labor cost = 1440000 / 1600000 = $0.90 per $ of direct labor cost
Handheld
Home
Overheads:
Direct labor cost
1160400
439600
Overhead allocation rate
0.90
0.90
Overheads allocated
1044360
395640
Materials
750000
684000
Labor
1160400
439600
Total costs
$2954760
$1519240
No. of units
28000
10000
Total cost per unit
$105.53
$151.92
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 x 40 = 528,000
13,200 x 10 = 132,000
Quality tests performed
594,000
30
594,000/30 = 19,800
19,800 x 12 = 237,600
19,800 x 18 = 356,400
Shipping orders processed
186,000
150
186,000/150 = 1,240
1,240 x 100 = 124,000
1,240 x50 = 62,000
Total cost
1,440,000
889,600
550,400
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