Question

Scottsdale Ltd. manufactures a variety of high-volume and low-volume products to customer demand. Presented is information on 2009 manufacturing overhead and activity cost drivers.

Level	Total Cost	Units of Cost Driver
Unit	$400,000	20,000 machine hours
Batch	200,000	1,000 customer products
Product	200,000	50 products

Product X1 required 1,000 machine hours to fill 20 customer orders for a total of 8,000 units.

(a) Assuming all manufacturing overhead is estimated and predicted on the basis of machine hours, determine the predicted total overhead costs to produce the 8,000 units of product X1.

(b) Assuming manufacturing overhead is estimated and predicted using separate rates for machine hours, customer orders, and products (a multiple-level cost hierarchy), determine the predicted total overhead costs to produce the 8,000 units of product X1.

(c) Calculate the error in predicting manufacturing overhead using machine hours versus using multiple cost drivers. Indicate whether the use of only machine hours results in overpredicting or underpredicting the costs to produce 8,000 units of product X1.

(d) Determine the error in the prediction of X1 batch-level costs resulting from the use of only machine hours. Indicate whether the use of only machine hours results in overpredicting or underpredicting the batch-level costs of product X1.

(e) Determine the error in the prediction of X1 product-level costs resulting from the use of only machine hours. Indicate whether the use of only machine hours results in overpredicting or underpredicting the product-level costs of product X1.

Answer 1

Answer with working is given below

Machine Hour Rate Total Overheads Machine hours $800,000 20,000 Per Machine hour a) Total Overheads based on Machine hour Total Machine hours 1,000 Machine hour rate $40 Total Overheads $40,000 b) Calculation of Activity Rate Level Total Cost Total Activities Activity Driver Activity Driver Rate $20 $200 $4,000 Unit Level Batch Level Product Level $400,000 $200,000 $200,000 20,000 machine hour 1,000 customer products 50 products Total Overhead cost Level Total Cost Unit Level Batch Level Product Level Activity Activities Activity Driver Rate Consumed Driver $20.00 1,000 machine hour $200.00 20 customer products $4,000.00 1 products $20,000 $4,000 $4,000 $28,000 Total cost as per Machine hours based Total cost as per Activity based Over prediction $40,000 $28,000 $12,000 d) Batch level cost Machine hours Machine hour rate Machine hours for Product X1 Total Batch level cost based on Machine hours Batch level cost as per Activity consumed Over Prediction $200,000 20,000 $10 1,000 $10,000 $4,000 $6,000 e) Product Level cost Machine hours Machine hour rate Machine hours for Product X1 Total Product level cost based on Machine hours Product level cost as per Activity consumed Over Prediction $200,000 20,000 $10 1,000 $10,000 $4,000 $6,000