Volume-Based Costing Versus ABC The California Cooking Oil Company (CCO) has been using machine-hours as the basis to determine overhead costs for all products. An ABC project team points out that the firm manufactures several products, each of which use significantly different factory supporting resources. As a start, the team suggests the following overhead cost pools, cost drivers, and estimated cost driver levels for manufacturing overheads:
|
| Estimated Cost Driver Level |
|
Overhead Cost Pool | Cost Driver | Budgeted Overhead | |
Machine setups | Number of setups | 100 | $100,000 |
Materials handling | Number of barrels | 8,000 | 80,000 |
Quality control | Number of inspections | 1,000 | 200,000 |
Other overhead cost | Machine-hours | 10,000 | 100,000 |
CCO has recently completed production of 500 barrels each of P5 and G23. P5 is a corn-based oil distributed primarily through supermarkets. G23 is made from olive oil, flaxseed oil, and other exotic ingredients and sold to up scale restaurants as a gourmet food. P5 and G23 are two of the firm’s many products. The production requires the following operations:
| Number of Cost Drivers | |
Overhead Cost Pool | P5 | G23 |
Ma chine setups | 1 setup | 50 setups |
Materials handling | 500 barrels | 500 barrels |
Quality inspections | 2 times | 20 times |
Machine-hours | 1,000 hours | 1,000 hours |
Required
1. Determine the overhead costs per barrel of P5 and G23 using the current single cost driver system based on machine-hours.
2. Determine the overhead costs per barrel of P5 and G23 using the multiple cost driver system suggested by the ABC project team.
3. Explain how the choice of costing system can be an important competitive factor for CCO. How can the costing system help the firm become more profitable and competitive?
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