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 $1,195,000 based on production of 290,000 handheld consoles and 100,000 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? (Round "Total cost per unit" to 2 decimal places.)

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.)

Handheld Home Total Direct labor $ 1,090,750 $ 403,000 $ 1,493,750 Materials 800,000 708,000 1,508,000

Explanation / Answer

Requirement a: Overhead Costs allocation using cost drivers: Overhead Rate Handheld Home Total Number of Production Runs 11000 385000 110000 495000 Quality Tests Performed 17000 187000 289000 476000 Shipping Orders Processed 1400 140000 84000 224000 Total 712000 483000 1195000 Total Cost per unit: Handheld Home Total Material 800000 708000 1508000 Labor 1090750 403000 1493750 Overhead 712000 483000 1195000 Total 2602750 1594000 4196750 Number of units 290000 100000 Total Cost per unit 8.975 15.94 Overhead Total Cost per unit Handheld 712000 8.98 Home 483000 15.94 Requirement b: Cost allocation using direct labor Hours: Overhead Rate Total Overheads / Direct Labor 1195000 / 1493750 0.80 Handheld Home Total Direct Labor 1090750 403000 1493750 Overheads (Labor * Rate) 872600 322400 1195000 Total Cost per unit: Handheld Home Total Material 800000 708000 1508000 Labor 1090750 403000 1493750 Overhead 872600 322400 1195000 Total 2763350 1433400 4196750 Number of units 290000 100000 Total Cost per unit 9.53 14.33 Overhead Total Cost per unit Handheld 872600 9.53 Home 322400 14.33

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