If done right, I believe that all of the costs can be allocated to each of the three products through both direct and overhead costs. The only direct costs that are being included currently are labor and manufacturing costs. I broke up overhead into overhead based off direct labor and overhead based on units sold.
Overhead based on direct labor includes the cost of the Product Development Support Center, interest expenses, and general and administrative expenses. The Product Development Support Center failed to account for hours spent on each product, which will not only complicate the product cost calculations, but also the calculation of capitalization expenses later on. The Development Support Center will be most used during the peak (i.e. most hours) time of development for each product, and hours worked will probably be the best way to divvy up the costs of the support center. The money invested in the company is being used on developing each product right now. I figured interest would best be divvied up by hours to attribute the interest expense to the product using the most of the investment. Similar to the reasons stated before general and administrative costs are going to be associated with the most prominent product, and that is best seen through hours. (Figure A)
Overhead based on units sold includes only sales and marketing. Sales and marketing will be targeted mostly towards the products that are already on the market, and so units sold is the best way to associate the cost with each product. (Figure A)
Estimate Total Product Cost for Each of the Three Products
The estimated total product cost for Secret Agent for the year of 2003 are $563,036. This consist of direct labor/manufacturing costs and the allocation of the labor/units sold overheads. Secret Agent was allocated the entire amount of the units sold overhead due to the fact that it was the only product that sold units during 2003. (Figure C)
The estimated total product costs for The Wild West and World Search for the year of 2003 are $557,958 and $688,148, respectively. These numbers consist of direct labor and allocation of direct labor overhead. Units sold overhead and direct manufacturing costs are excluded as neither of the products were completed and being sold to the public yet. According to the facts, the hourly rate paid to the product team increased from $18.00 per hour to about $20.00 per hour during the 4th quarter of the year, and there is no explicitly stated reason for the change in rate. Due to the change in hourly rate the estimated total product cost is lower than the actual product cost for both The Wild West and World Search products. (Figure C)
Suggested Future Changes for Costing System and Product Development Procedures
As a new company the costs for each product have not become consistent yet. Using 2003 as an outline, AdCom should create an estimate of costs each quarter and/or year for each product it currently has and any they...