Maglie Company manufactures two video game consoles: handheld and home. The handheld consoles are smaller and less expensive than 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 $1,440,000 based on production of 28,000 handheld consoles and 10,000 home consoles. Direct labor and direct materials costs were as follows. Handheld $1,160,400 750,000 Total $1,600,000 1,434,000 Home Direct labor Materials $439,600 684,000 Management has determined that overhead costs are caused by three cost drivers. These drivers and their costs for last year are as follows. Activity Level Handheld Costs Assigned $ 660,000 594,000 186,000 Cost Driver Home Total Number of production runs Quality tests performed Shipping orders processed 40 12 10 50 30 18 100 50 150 Total overhead $1,440,000

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