Question

Chapter 4 Activity-Based Costing and Analysis 163 Style for home use, Salsa and drivers associ Problem 4-5A Pricing analysis with ABC and a plantwide overhead rate A1 A2 P1 P3 Salsa Company produces its condiments in for home use, Salsa is prepared in department and packa wwo types: Extra Fine for restaurant customers and Family associated with these two manufacturing processes and its production Suport activities follow "Packaged in department 2 The activities overhead costs Process Activity Overhead Cost Driver Quantity Department Moving $4,500 Cooking Machine hours 1,500 Product testing 11.250 G Machine hours 1,500 112.500 / Batches 600 $128,250 Department 2 Machine calibration $250,000 Production runs 400 Labeling 12,000 Cases of output 120.000 Defects 6,000 Cases of output 120000 $268,000 Support Recipe formulation $ 90,000 Focus groups Heat, lights, and water 27,000 Machine hours 1.500 Materials handling 65,000 Container types $182,000 Additional production information about its two product lines follows. Units produced ......... Batches. Machine hours.......... Focus groups .......... Container types ......... Production runs......... 20.000 es 200 batches 500 MH 30 groups 5 containers 200 runs Paraly Style cases 400 butches 1.000 MH 15 groups 3 containers 200 runs Check 2) Cost per case: Extra Fine, $10.82: Family Style, $9.82 Required 1. Using a plantwide overhead rate based on cases, compute the overhead cost that is assigned to each case of Extra Fine Salsa and each case of Family Style Salsa. 2. Using the plantwide overhead rate, determine the total cost per unit for the two products if the direct materials and direct labor cost is $6 per case of Extra Fine and $5 per case of Family Style. 3. If the market price of Extra Fine Salsa is $18 per case and the market price of Family Style Salsa is $9 per case, determine the gross profit per case for each product. What might management conclude about each product line? 4. Using ABC, compute the total cost per case for each product type if the direct labor and direct materials cost is $6 per case of Extra Fine and $5 per case of Family Style. 5. If the market price is $18 per case of Extra Fine and $9 per case of Family Style, determine the gross profit per case for each product. How should management interpret the market prices given your computations? 6. Would your pricing analysis be improved if the company used departmental rates based on machine hours in department 1 and number of cases in department 2, instead of ABC? Explain. (4) Cost per case: E Fine, $20.02: Family Style, $7.9

Answer 1

1	Computation of Overhead Cost per case
		Total
	Department 1	$               128,250.00
	Department 2	$               268,000.00
	Support	$               182,000.00
	Total Overhead Cost (A)	$               578,250.00
	Total Cases (20000+100000) (B)	120000.00
	Overhead Cost per Case (A/B)	$                            4.82

2	Computation of Total Cost per unit of Extra fine & Family Sytle
		Extra fine	Family Sytle
	Direct Material & Labour	$                            6.00	$                 5.00
	Overhead Cost per case	$                            4.82	$                 4.82
	Total Cost per unit	$                         10.82	$                 9.82

3	Computation of Gross Profit per case
		Extra fine	Family Sytle
	Market Price per case	18	9
	Less: Total Cost per case	-10.82	-9.82
	Gross Profit per Case	7.18	-0.82

Part.4

4	Computation of Overhead Cost per unit of driver
	Process	Activity	Overhead Cost	Driver	Quantity	Overhead Cost per unit of driver
	(A)	(B)	(C )	(D)	(E )	(F) = (C )/(E )
	Department 1	Mixing	$        4,500.00	Machine Hours	1500	$                       3.00
		Cooking	$      11,250.00	Machine Hours	1500	$                       7.50
		Product testing	$    112,500.00	Batches	600	$                   187.50
	Department 2	Machine calibration	$    250,000.00	Production runs	400	$                   625.00
		Labeling	$      12,000.00	Cases of output	120000	$                       0.10
		Defects	$        6,000.00	Cases of output	120000	$                       0.05
	Support	Recipe formulation	$      90,000.00	Focus Groups	45	$               2,000.00
		Heat, lights and water	$      27,000.00	Machine hours	1500	$                     18.00
		Materials handling	$      65,000.00	Container types	8	$               8,125.00
	Computation of Total Cost per unit Based on ABC Costing approach
					Extra fine		Family Style
		Activities	Driver	Overhead Cost per unit of driver	Expected Drivers	Total Cost	Expected Drivers	Unit Cost per unit
		(A)	(B)	(C )	(D)	(E ) = (C )*(D)	(E )	(F) =(C )*(E )
	Direct Material & Direct Labour Cost ($6*20000; $5*100000)					$          120,000.00		$   500,000.00
	Overhead Cost:
	Department 1
		Mixing	Machine hours	$                      3.00	500	$               1,500.00	1000	$        3,000.00
		Cooking	Machine hours	$                      7.50	500	$               3,750.00	1000	$        7,500.00
		Product testing	Batches	$                 187.50	200	$             37,500.00	400	$     75,000.00
	Department 2
		Machine Calibration	Production runs	$                 625.00	200	$          125,000.00	200	$   125,000.00
		Labeling	Cases of output	$                      0.10	20000	$               2,000.00	100000	$     10,000.00
		Defects	Cases of output	$                      0.05	20000	$               1,000.00	100000	$        5,000.00
	Support
		Recipe formulation	Focus Groups	$              2,000.00	30	$             60,000.00	15	$     30,000.00
		Heat, lights and water	Machine hours	$                    18.00	500	$               9,000.00	1000	$     18,000.00
		Materials handling	Container types	$              8,125.00	5	$             40,625.00	3	$     24,375.00
	Total Cost					$          400,375.00		$   797,875.00
	Unit Cost of Extra Fine = Total Cost/ No of Cases		=$ 400375.00/20000 =		$          20.02
	Unit Cost of Family Style = Total Cost/ No of Cases		= $797875/100000 =		$            7.98

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