Question

asbury coffee enterprises (ace) manufactures two models of coffee grinders: personal and commercial. the personal grinders have a smaller capacity and are less durable than the commercial grinders. ace only recently began producing the commercial model. since the introduction of the new product, profits have been steadily declining, although sales have been increasing. the management at ace believes that the problem might be in how the accounting system allocates costs to products. the current system at ace allocates manufacturing overhead to products based on direct labor costs. for the most recent year, which is representative, manufacturing overhead totaled $1,902,000 based on production of 30,000 personal grinders and 10,000 commercial grinders. direct costs were as follows: personalcommercialtotal direct materials$ 1,437,000$ 517,500$ 1,954,500 direct labor1,020,000565,0001,585,000 management has determined that overhead costs are caused by three cost drivers. these drivers and their costs for last year are as follows: cost drivercosts assignedactivity leveltotal personalcommercial number of production runs$ 900,000502575 quality tests performed780,000152540 shipping orders processed222,00015050200 total overhead$ 1,902,000 required: 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 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?

Answer 1

To allocate overhead costs, we use the three cost drivers provided. The overhead allocated to personal and commercial grinders can be calculated based on the cost drivers. The total cost per unit for each product is obtained by adding the allocated overhead to the direct costs. If direct labor cost is used to allocate overhead, the overhead allocated to each product will be different, resulting in different total costs per unit.

Step-by-step explanation:

To allocate overhead costs to each product, we need to determine the amount of overhead to be assigned to each product based on the three cost drivers provided. The cost drivers are the number of production runs, quality tests performed, and shipping orders processed. Let's calculate the overhead for each product:

1. For personal grinders:
   Total cost driver activity level = Sum of number of production runs + quality tests performed + shipping orders processed
   = 50 + 25 + 75 = 150
   Overhead allocated to personal grinders = (Total overhead / Total cost driver activity level) * Number of production runs
   = ($1,902,000 / 150) * 30,000 = $380,400
2. For commercial grinders:
   Total cost driver activity level = Sum of number of production runs + quality tests performed + shipping orders processed
   = 50 + 40 + 200 = 290
   Overhead allocated to commercial grinders = (Total overhead / Total cost driver activity level) * Number of production runs
   = ($1,902,000 / 290) * 10,000 = $128,069

The total cost per unit produced for each product can be calculated by adding the allocated overhead cost to the direct costs:

1. For personal grinders:
   Total cost per unit = Direct materials + Direct labor + Allocated overhead cost
   = $1,437,000 + $1,020,000 + $380,400 = $2,837,400
2. For commercial grinders:
   Total cost per unit = Direct materials + Direct labor + Allocated overhead cost
   = $517,500 + $565,000 + $128,069 = $1,210,569

If the allocation was based on direct labor cost, the overhead allocated to each product would be:

1. For personal grinders:
   Overhead allocated to personal grinders = (Direct labor cost for personal grinders / Total direct labor cost) * Total overhead
   = ($1,020,000 / $1,585,000) * $1,902,000 = $1,222,270
2. For commercial grinders:
   Overhead allocated to commercial grinders = (Direct labor cost for commercial grinders / Total direct labor cost) * Total overhead
   = ($565,000 / $1,585,000) * $1,902,000 = $679,730

The total cost per unit produced for each product using direct labor cost to allocate overhead would be:

1. For personal grinders:
   Total cost per unit = Direct materials + Direct labor + Allocated overhead cost
   = $1,437,000 + $1,020,000 + $1,222,270 = $3,679,270
2. For commercial grinders:
   Total cost per unit = Direct materials + Direct labor + Allocated overhead cost
   = $517,500 + $565,000 + $679,730 = $1,762,230