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	$600,000	20,000 machine hours
Batch	200,000	1,000 customer orders
Product	400,000	50 products

Product X1 required 3,000 machine hours to fill 10 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.
$Answer

(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.
$Answer

(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.
$Answer AnswerOver-predictionUnder-prediction

(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.
$Answer AnswerOver-predictionUnder-prediction

(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 AnswerOver-predictionUnder-prediction

Answer 1

(a) Predetermined overhead rate = Total manufacturing ocerhead cost/Total machine-hours = ($600000 + $200000 + $400000)/20000 = $1200000/20000 = $60 per machine-hour

Predicted total overhead costs to produce 8000 units of X1 = 3000 X $60 = $180000

(b) Predicted total overhead costs to produce 8000 units of X1 = $100000

Level	Total Cost	Units of Cost Driver	Activity Rate	Product X1
				Cost Driver Usage	Overhead Costs
Unit	600000	20000	30	3000	90000
Batch	200000	1000	200	10	2000
Product	400000	50	8000	1	8000
Total					100000

(c) $180000 - $100000 = $80000 Over-prediction

(d) Batch-level: ($200000 x 3000/20000) - $2000 = $30000 - $2000 = $28000 Over-prediction

(e) Product-level: ($400000 x 3000/20000) - $8000 = $60000 - $8000 = $52000 Over-prediction