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

Answer 1

Answer:

a. $889,600

b. $550,400

Explanation:

Base on the scenario been described in the question and management has willing that overhead costs has to be allocated based on 3 cost drivers, then we must assign as follows

                                      production runs     overhead         total

handheld consoles              40/50              $660,000       $528,000

home consoles                    10/50               $660,000        $132,000

total                                       50/50                                      $660,000

                                        quality tests          overhead         total

handheld consoles              12/30              $594,000         $237,600

home consoles                    18/30               $594,000        $356,400

total                                      30/30                                        $594,000

                                      shipping orders     overhead         total

handheld consoles              100/150              $186,000       $124,000

home consoles                     50/150               $186,000       $62,000

total                                       150/150                                     $186,000

Overhead allocated total = $528,000 + $237,600 + $124,000

Overhead allocated total = $889,600

Overhead allocated total = $132,000 + $356,400 + $62,000

Overhead allocated total= $550,400

Answer 2

Answer:

total overhead allocated to handheld consoles = $889,600

total overhead allocated to home consoles = $550,400

Explanation:

since management has determined that overhead costs must be allocated based on 3 cost drivers, then we should assign:

                                      production runs     overhead         total

handheld consoles              40/50              $660,000       $528,000

home consoles                    10/50               $660,000        $132,000

total                                       50/50                                      $660,000

                                        quality tests          overhead         total

handheld consoles              12/30              $594,000         $237,600

home consoles                    18/30               $594,000        $356,400

total                                      30/30                                        $594,000

                                      shipping orders     overhead         total

handheld consoles              100/150              $186,000       $124,000

home consoles                     50/150               $186,000       $62,000

total                                       150/150                                     $186,000

total overhead allocated to handheld consoles = $528,000 + $237,600 + $124,000 = $889,600

total overhead allocated to home consoles = $132,000 + $356,400 + $62,000 = $550,400