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Question 2 Waterway's Nut House is a processor and distributor of a variety of different nuts. The company buys nuts from around the world and roasts, seasons, and packages them for resale. Waterway's Nut House currently offers 17 different types of nuts In one-pound bags through catalogs and gourmet shops. The company's major cost is that of the raw nuts; however, the predominantly automated roasting and packing processes consume a substantial amount of manufacturing overhead cost. The company uses relatively little direct labor Some of Waterway's nuts are very popular and sell in large volumes, but a few of the newer types sell in very low sales volumes. Waterway's prices its nuts at cost (including overhead) plus a markup of 40%. If the resulting prices of certain nuts are significantly higher than the market price, adjustments are made. Although the company competes primarily on the quality of its products, customers are price conscious Data for the annual budget include manufacturing overhead of $5,871,070, allocated on the basis of each product's direct labor cost. The annual budgeted direct labor cost totals $1,231,000. Based on the sales budget and raw materials standards, purchases and use of raw materials are expected to total $9,020,000 for the year. The unit costs of a one-pound bag of two of the company's products follows Cashews Chestnuts Raw materials $4.00 Direct labor 0.33 0.33 Waterway's controller believes that the traditional costing system may be providing misleading cost information, so she has developed the following analysis of the annual budgeted manufacturing costs Budgeted Activity 11,430 1,850 Budgeted Cost Activity Purchasing Material handling Quality control Roasting Seasoning Cost Driver Purchase orders Number of setups Number of batches Roasting hours Seasoning hours $1,223,010 1,544,750 295,850 1,722,060 610,380 610 95,670 33,910

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