Question

The Purple Peace Candle Company is reexamining its pricing based upon a recent report from a consultant. Currently, the company uses a volume based pricing system with direct labor hours as the cost driver. They are considering a system using machine hours as the cost driver. The company estimates the following: . Estimated Total Direct Labor Hours: 50,000 Estimated Total Machine Hours: 200,000 Estimated Total Manufacturing Overhead: $2,000,000 Each batch is produced in batches of 1,000 candles The Batch ticket for Batch 197 for the Specialty Purple Candle shows the following: Batch Number 197 Direct Labor-Candle Makers John - 10 hours @$10 per hour Barry- 15 hours @ $20 per hour Carla-20 hours @ $15 per hour Other Information: Candles produced: 1,000 Direct Material Wicks-20 spools @ $30 per spool Wax-100 pounds@ $2 per pound Jars-60 boxes@ $25 per box Machine hours used: 250 machine hours Use the information above to answer questions 1 through 4. Show and label all of your work, identifying all portions of the cost (round to the nearest penny). Use of cost sheets is optional.

Answer 1

Manufacturing overhead is allocated by using two ways

• Traditional method - under this method only one rate is used to allocate all overhead.
• Activity based costing - under this method multiple rate is used to allocate overhead according to consumption of resources.

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