Question

Doaktown Products manufactures fishing equipment for recreational uses. The Miramichi plant produces the company's two versions of a special reel used for river fishing. The two models are the M-008, a basic reel, and the M-123, a new and improved version. Cost accountants at company headquarters have prepared costs for the two reels for the most recent period. The plant manager is concerned. The cost report does not coincide with her intuition about the relative costs of the two models. She has asked you to review the cost accounting and help her prepare a response to headquarters. Manufacturing overhead is currently assigned to products based on their direct labor costs. For the most recent month, manufacturing overhead was $259,200. During that time, the company produced 10,200 units of the M-008 and 2,400 units of the M-123. The direct costs of production were as follows. Direct materials Direct labor M-008 M-123 $ 81,600 $ 96,000 81,600 48,000 Total $177,600 129,600 5 Management determined that overhead costs are caused by three cost drivers. These drivers and their costs for last year were as follows Cost Driver Number of machine-hours Number of production runs Number of inspections Total overhead Costs $ 72,200 90,000 97,000 $259,200 Activity Level M-008 M-123 Total 1,000 9,000 10,000 20 20 40 10 40 50 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 of the 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?

Answer 1

a. Total Overhead Total Unit Cost M-008 $ $ M-123 71,620 $ 23.02 $ 187,580 138.16 Calculation of Activity Rate Cost Driver Number of machine-hours Number of production runs Number of inspections Total Total Cost Total Activity Level Activity Rate [A] [B] [A/B] $ 72,200 10,000 $ 7.22 90,000 40 $ 2,250.00 97,000 50 $ 1,940.00 $ 259,200 Allocation of Overhead to Products Cost Driver Activity Rate Activity Level [B] [A] $ 7.22 Number of machine-hours Number of production runs Number of inspections Total Costs M-008 M-123 Total Total Cost Activity Level Total Cost [C = AⓇB] [D] [E = A x D] [C+E] 1,000 $ 7,220 9,000 $ 64,980 $ 72,200 20 45,000 20 45,000 90,000 10 19,400 40 77,600 97,000 $ 71,620 $ 187,580 $ 259,200 2,250.00 1,940.00 Calculation of total unit cost M-008 M-123 Direct Material $ 81,600 $ Direct labor 81,600 Overhead 71,620 Total Cost $ 234,820 $ · Number of Units produced 10,200 Cost per Unit $ 23.02 $ 96,000 48,000 187,580 331,580 2,400 138.16

b. Total Overhead Total Unit Cost M-008 $ $ M-123 163,200 $ 32.00 $ 96,000 100.00 Predetermined Overhead rate Total Manufacturing Costs - Total Labor Costs 259,200 - 129,600 200% of Direct labor cost Allocation of Overhead M-008 Direct Labor Applied Overhead (Direct labor ~ 200%) M-123 81,600 163,200 48,000 96,000 Calculation of total unit cost M-008 M-123 Direct Material $ 81,600 $ Direct labor 81,600 Overhead 163,200 Total Cost $ 326,400 $ • Number of Units produced 10,200 Cost per Unit $ 32.00 $ 96,000 48,000 96,000 240,000 2,400 100.00

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