Maggie Co manufactures two video consoles: handheld and home. The handheld are smaller and less expensive than the home consoles. Since the intro of the home model profits have been steadily declining. Management believes it is because of the inaccurate allocation of costs to the products, particularly since the volume of home console sales have been increasing. Upon investigation, you find that overhead cost is currently assigned to products based on their direct labor costs. Data showed that overhead last year was $1,440,000 based on 28,000 handheld consoles and 10,000 home consoles. Direct materials and direct labor costs were as follows: HANDHELD HOME TOTAL Direct Materials $ 750,000 $ 684,000 $ 1,434,000 Direct Labor 1,160,400 439,600 1,600,000 Management, after a careful study, has determined that overhead are caused by three cost drivers. These cost drivers and their costs for last year are as follows: COST DRIVER ASSIGNED COSTS ACTIVITY LEVEL 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 $ 1,440,000 REQUIRED: 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? 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? How might the results from using activity based costing in requirement (a) help management understand Magpie’s declining profits?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter3: Cost Behavior

Section: Chapter Questions

Problem 34P: Kimball Company has developed the following cost formulas:...

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Maggie Co manufactures two video consoles: handheld and home. The handheld are smaller and less expensive than the home consoles. Since the intro of the home model profits have been steadily declining. Management believes it is because of the inaccurate allocation of costs to the products, particularly since the volume of home console sales have been increasing. Upon investigation, you find that overhead cost is currently assigned to products based on their direct labor costs. Data showed that overhead last year was $1,440,000 based on 28,000 handheld consoles and 10,000 home consoles. Direct materials and direct labor costs were as follows:

	HANDHELD	HOME	TOTAL
Direct Materials	$ 750,000	$ 684,000	$ 1,434,000
Direct Labor	1,160,400	439,600	1,600,000

Management, after a careful study, has determined that overhead are caused by three cost drivers. These cost drivers and their costs for last year are as follows:

COST DRIVER	ASSIGNED COSTS	ACTIVITY LEVEL
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	$ 1,440,000

REQUIRED:

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?
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?
How might the results from using activity based costing in requirement (a) help management understand Magpie’s declining profits?

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