Munoz Sporting Equipment manufactures baseball bats and tennis rackets. Department B produces the baseball bats, and Department T produces the tennis rackets. Munoz currently uses plantwide allocation to allocate its overhead to all products. Direct labor cost is the al- location base. The rate used is 200 percent of direct labor cost. Last year, revenue, materials, and direct labor were as follows:

Baseball Bats Tennis Rackets

Sales Revenue $2,700,000 $1,800,000

Direct labor 500,000 250,000

Direct materials 1,100,000 550,000

Required

a. Compute the profit for each product using plantwide allocation.

b. Maria, the manager of Department T, was convinced that tennis rackets were really more

profitable than baseball bats. She asked her colleague in accounting to break down the overhead costs for the two departments. She discovered that had department rates been used, Department B would have had a rate of 150 percent of direct labor cost and Depart- ment T would have had a rate of 300 percent of direct labor cost. Recompute the profits for each product using each department's allocation rate (based on direct labor cost).

c. Why are the results different in requirements (a) and (b)?

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Activity-Based versus Traditional Costing

Rodent Corporation produces two types of computer mice, wired and wireless. The wired mice are designed as low-cost, reliable input devices. The company only recently began producing the higher-quality wireless model. Since the introduction of the new product, profits have been steadily declining. Management believes that the accounting system is not accurately al- locating 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 $360,000 based on production of 140,000 wired mice and 50,000 wireless mice. Direct labor and direct materials costs were as follows:

Wired Wireless Total

Direct Labor $290,100 $109,900 $400,000

Materials 187,500 171,000 358,500

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

Cost Driver Cost Assigned Wired Wireless Total

Number of productions runs $165,000 20 5 25

Quality test performed 148,500 6 9 15

Shipping orders processed 46,500 50 25 75

Total overhead $360,000

Required

a. 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?

b. How much overhead will be assigned to each product if direct labor cost is used to al- locate overhead? What is the total cost per unit produced for each product?

c. How might the results from using activity-based costing in requirement (a) help manage- ment understand Rodent's declining profits?

Answer rating: 100% (QA)

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