Question

Sherwin Williams uses traditional volume based costing to determine its product costs. This is the method we learned in chapter 3 Job Order Costing. Currently, Sherwin Williams allocates overhead based on direct labor hours. The company estimated 10,000 direct labor hours and total overhead of $1,970,000 for the year. They have determined the following activity cost pools for overhead cost.

Overhead Activities

Machine setup                  $950,000

Material handling             $820,000

Machine operation          $200,000

Total                                      $1,970,000

Note: Activity cost pools aren’t necessary for traditional volume based costing. If the company switched to Activity-Based Costing, the activity cost pools would be necessary.

In January the company completed one batch of Mirlite paint and one batch of Subdue. The following data are for the production of single batches of the two products.

                                                                                Mirlite                   Subdue

Gallons produced                                            50,000                   30,000

Direct labor hours                                            400                         250

Machine hours                                                  800                         250

Direct labor cost                                               $10,000                 $7,500

Direct materials cost                                       $350,000              $150,000

Required:

Show all calculations (including formulas) to receive full credit.

1. Calculate the pre-determined overhead rate for the year.

2. Calculate applied overhead for Mirlite in January.

3. Calculate applied overhead for Subdue in January.

4. Calculate the unit product cost for Mirlite.

5. Calculate the unit product cost for Subdue.

6. what advantages might activity-based costing offer over traditional based costing for Sherwin-Williams?

Answer 1