For years, Tamarindo Company produced only one product:backpacks. Recently, Tamarindo added a line of duffel bags. Withthis addition, the company began assigning overhead costs by usingdepartmental rates. (Prior to this, the company used apredetermined plantwide rate based on units produced.)Surprisingly, after the addition of the duffel-bag line and theswitch to departmental rates, the costs to produce the backpacksincreased, and their profitability dropped.

Josie, the marketing manager, and Steve, the production manager,both complained about the increase in the production cost ofbackpacks. Josie was concerned because the increase in unit costsled to pressure to increase the unit price of backpacks. She wasresisting this pressure because she was certain that the increasewould harm the company's market share. Steve was receiving pressureto cut costs also, yet he was convinced that nothing different wasbeing done in the way the backpacks were produced. After somediscussion, the two managers decided that the problem had to beconnected to the addition of the duffel-bag line.

Upon investigation, they were informed that the only real changein product costing procedures was in the way overhead costs areassigned. A two-stage procedure was now in use. First, overheadcosts are assigned to the two producing departments, Patterns andFinishing. Second, the costs accumulated in the producingdepartments are assigned to the two products by using direct laborhours as a driver (the rate in each department is based on directlabor hours). The managers were assured that great care was takento associate overhead costs with individual products. So that theycould construct their own example of overhead cost assignment, thecontroller provided them with the information necessary to show howaccounting costs are assigned to products:

	PatternsDept.	FinishingDept.	Total
Accounting cost	$30,000	$90,000	$120,000
Transactions processed	20,000	60,000	80,000
Total direct labor hours	15,000	30,000	45,000
Direct labor hours per backpack*	0.10	0.20	0.30
Direct labor hours per duffel bag*	0.20	0.40	0.60

* Hours required to produce one unit of each product.

The controller remarked that the cost of operating theaccounting department had doubled with the addition of the newproduct line. The increase came because of the need to processadditional transactions, which had also doubled in number.

During the first year of producing duffel bags, the companyproduced and sold 100,000 backpacks and 25,000 duffel bags. The100,000 backpacks matched the prior year’s output for thatproduct.

3. Compute the amount of accounting cost assigned to eachbackpack and duffel bag by using departmental rates based on directlabor hours. (Round your answers to the nearest cent.)

Overhead rates
Patterns	perdirect labor hour
Finishing	perdirect labor hour

Points:

0 / 2

Question not attempted.

Score: 0/24

Tamarindo Company

Cost Assignment

1		Backpacks	Duffel Bags
2	Patterns
3	Finishing
4	Total per unit