Maglie Company manufactures two video game consoles: handheld and home. The handheld consoles are smaller and less expensive han 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 $1,204,000 based on production of 300,000 handheld consoles and 92,000 home consoles. Direct labor and direct materials costs vere as follows. Handheld Нome Total Direct labor $1,127,000 740,000 $378,000 693,000 $1,505,000 1,433,000 Materials Management has determined that overhead costs are caused by three cost drivers. These drivers and their costs for last year are as ollows. Activity Level Costs Assigned $ 520,000 544,000 Cost Driver Handheld Home Total Number of production runs Quality tests performed Shipping orders processed 30 10 40 13 19 32 140,000 80 60 140 Total overhead $1,204,000
Maglie Company manufactures two video game consoles: handheld and home. The handheld consoles are smaller and less expensive han 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 $1,204,000 based on production of 300,000 handheld consoles and 92,000 home consoles. Direct labor and direct materials costs vere as follows. Handheld Нome Total Direct labor $1,127,000 740,000 $378,000 693,000 $1,505,000 1,433,000 Materials Management has determined that overhead costs are caused by three cost drivers. These drivers and their costs for last year are as ollows. Activity Level Costs Assigned $ 520,000 544,000 Cost Driver Handheld Home Total Number of production runs Quality tests performed Shipping orders processed 30 10 40 13 19 32 140,000 80 60 140 Total overhead $1,204,000
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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