INDIANA CORPORATION
…… is a bakery that is known for its strawberry cheesecake. Italso makes 12 different kinds of cheesecake as well as many othertypes of bakery items. The company uses normal costing withdirect-labor dollars as their base for allocating overhead to itsvarious bakery products.
The company estimates overhead for the upcoming year of $421,000and estimates direct labor of $2,000,000.
The following estimated information is available for theirStrawberry Cheesecake product:
Annual production | 17,500 units |
Direct materials per unit | $6 |
Direct labor per unit | $2 |
Required:
- Compute the predetermined rate (overhead perdollar of labor) – Round this to TWO decimal places
- Determine the amount of estimated overhead applied toone unit of strawberry cheesecake (one cake) AND theestimated amount of overhead to be applied to that product line forthe year
- What is the total estimated unit cost of thestrawberry cheesecake?
NOW consider the following additionalinformation about the estimated overhead of $421,000. You haveanalyzed this amount, and determined that the following breakdownand have identified appropriate activities that appear to cause, ordrive these costs, as follows:
| | Overhead | Cost | Proposed Driver | Materials ordering | $ 72,000 | Number of purchase orders | Materials inspection | 75,000 | Number of receiving reports | Equipment setup | 105,000 | Number of setups | Quality control | 69,000 | Number of inspections | Other | 100,000 | Direct labor cost | Total manufacturing overhead | $421,000 | (estimated) |
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ASSUME that the following amounts of variouscost drivers will be used for all products and for the StrawberryCheesecake product:
| | Activity | All Products | Strawberry Cheesecake | Materials ordering | 8,000 orders | 100 | Materials inspection | 375 receiving reports | 60 | Equipment setup | 3,000 setups | 30 | Quality control | 3,000 inspections | 150 | Other | $2,000,000 direct labor | $35,000 |
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| - Briefly explain the process which the company went through inorder to arrive at the overhead information AND activity/driverinformation provided immediately above.
- Given this additional information, do you still like the unitcosts and estimated product costs for the year that you computed in#2 and #3 above? If not, explain WHY. Does the cost assignmentabove reflect the actual consumption of resources by the StrawberryCheesecake product?
- Using ACTIVITY BASED COSTING and the information above. Whatnew unit cost and estimated product cost would you proposemanagement use? WHY is this preferable?
- Was the Strawberry Cheesecake mis-costed by using the “peanutbutter costing” approach? If so, was it under- or over-costed ANDby how much per unit?
- Using the original allocation base of direct labor hours, whatpercentage of the overhead costs were being assigned to theStrawberry Cheesecake?
- Compute the consumption rates of Strawberry Cheesecake for theactivities indicated. What area or areas appear to be the “problemareas” in terms of product costing?
- Explain WHY, in plain English, your answer came out the way itdid. WHY did ABC provide a better allocation in this case?
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