Question

Products manufactures fishing equipment for recreational uses. The plant produces the company’s two versions of a special reel used for river fishing. The two models are the XY, a basic reel, and the ZM, 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 $280,000. During that time, the company produced 12,000 units of the XY and 2,000 units of the ZM. The direct costs of production were as follows:
XY
ZM
Total
Direct Materials
$100,000
$80,000
$180,000
Direct labor
$100,000
40,000
$140,000
Management determined that overhead costs are caused by three cost drivers. These drivers and their costs for the last year were as follows:
Cost Driver
Costs
Activity Level
XY
ZM
Total
Number of machine hours
$120,000
5,000
3,000
8,000
Number of production runs
70,000
10
10
20
Number of inspections
90,000
20
40
60
Total overhead
$280,000
Instructions:
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? (14 marks)
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? (6 marks)

Answer 1

,The cost drivers are used to allocate overheads to the products as follows:Number of machine hours: (120,000/8000) = $15 per machine hourXY: (5,000 * 1) + (10 * 1) + (20 * 1) = 35ZM: (3,000 * 1) + (10 * 1) + (40 * 1) = 50XY: 35 * 15 = $525ZM: 50 * 15 = $750Therefore, the overheads allocated to each product are as follows:XY = 525ZM = 750Total cost per unit produced for each productDirect materials Direct labor Overhead Total cost per unit producedXY 100,000 100,000 525 725ZM 80,000 40,000 750 870Under direct labor as a basis for allocating overheads:XY: Direct labor costs/total direct labor costs = (100,000 / 140,000) = 0.714ZM: Direct labor costs/total direct labor costs = (40,000 / 140,000) = 0.286Therefore, the overheads allocated to each product are as follows:XY: $200,800 * 0.714 = $143,092ZM: $200,800 * 0.286 = $57,708Total cost per unit produced for each productDirect materials Direct labor Overhead Total cost per unit producedXY 100,000 100,000 143,092 343,092ZM 80,000 40,000 57,708 177,708Thus, the overhead allocated to each product is different depending on the method used. In the first method, the cost drivers were used to allocate overhead, while in the second method, direct labor was used.