Question

Sara’s Salsa Company produces its condiments in two types: Extra Fine for restaurant customers and Family Style for home use. Salsa is prepared in department 1 and packaged in department 2. The activities, overhead costs, and drivers associated with these two manufacturing processes and the company’s production support activities follow.

Process Activity Overhead cost Driver Quantity
Department 1 Mixing $4,500 Machine hours 1,500
Cooking 11,250 Machine hours 1,500
Product testing 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 120,000
$268,000

Support Recipe formulation $90,000 Focus groups 45
Heat, lights, and water 27,000 Machine hours 1,500
Materials handling 65,000 Container types 8
$182,000

Additional production information about its two product lines follows.

Extra Fine Family Style
Units produced 20,000 cases 100,000 cases
Batches 200 batches 400 batches
Machine hours 500 MH 1,000 MH
Focus groups 30 groups 15 groups
Container types 5 containers 3 containers
Production runs 200 runs 200 runs

Required:
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.

Answer 1

Answer:

Extra Fine= $26

Family Style= $12.98

Explanation:

First, we need to calculate the activities rate for each department and support:

Predetermined manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

Department 1:

Mixing= 4,500/1,500= $3 per machine hour

Cooking= 11,250/1,500= $7.5 per machine hour

Product testing= 112,500/600= $187.5 per batch

Department 2:

Machine calibration= 250,000/400= $625 per production run

Labeling= 12,000/120,000= $0.1 per cases of output

Defects= 6,000/120,000= $0.05 per cases of output

Support:

Recipe formulation= 90,000/45= $2,000 per focus group

Heat, lights, and water= 27,000/1,500= $18 per machine hour

Materials handling= 65,000/8= $8,125 per container types

Now, we can allocate overhead to each product:

Extra Fine:

Department 1:

Mixing= 3*500= $1,500

Cooking= 7.5*500= $3,750

Product testing= 187.5*200= $37,500

Department 2:

Machine calibration= 625*200= 125,000

Labeling= 0.1*20,000= 2,000

Defects= 0.05*20,000= 1,000

Support:

Recipe formulation= 2,000*30= 60,000

Heat, lights, and water= 18*500= 9,000

Materials handling= 8,125*5= 40,625

Total allocated overhead= $280,375

Unitary cost= 280,375/20,000= $14

Family Style:

Department 1:

Mixing= 3*1,000= $3,000

Cooking= 7.5*1,000= $7,500

Product testing= 187.5*400= $75,000

Department 2:

Machine calibration= 625*200= 125,000

Labeling= 0.1*100,000= 10,000

Defects= 0.05*20,000= 5,000

Support:

Recipe formulation= 2,000*15= 30,000

Heat, lights, and water= 18*1,000= 18,000

Materials handling= 8,125*3= 24,375

Total allocated overhead= $297,875

Unitary cost= 297,875/100,000= $2.98

Finally, the total unitary cost:

Extra Fine= 6 + 6 + 14= $26

Family Style= 5 + 5 + 2.98= $12.98