Problem - 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 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 $330,000 based on production of 160,000 wired mice and 50,000 wireless mice. Direct labor and direct materials costs were as follows:
Wired Wireless Total
Direct labor $261,000 $99,000 $360,000
Materials 187,500 171,000 358,500
Management has determined that overhead costs are caused by three cost drivers. These drives and their costs for last year are as follows:
Activity Level
Cost Driver Cost Assigned Wired Wireless Total
Number of product runs $150,000 20 5 25
Quality tests performed 135,000 6 9 15
Shipping orders processed 45,000 50 25 75
Total Overhead $330,000
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?
How might the results from using activity-based costing in requirement (A) help management understand Rodent's declining profits?