Chapter 17: Q5PSA (page 798)

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
1. Using a plantwide overhead rate based on cases, compute the overhead cost that is assigned to each case of Extra Fine Salsa and each case of Family Style Salsa.
2. Using the plantwide overhead rate, determine the total cost per case for the two products if the direct materials and direct labor cost is $6 per case of Extra Fine and $5 per case of Family Style.
3. If the market price of Extra Fine Salsa is $18 per case and the market price of Family Style Salsa is $9 per case, determine the gross profit per case for each product. What might management conclude about each product line?
4. 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.
5. If the market price is $18 per case of Extra Fine and $9 per case of Family Style, determine the gross profit per case for each product. How should management interpret the market prices given your computations?
6. Would your pricing analysis be improved if the company used departmental rates based on machine hours in department 1 and number of cases in department 2 instead of ABC? Explain.

Short Answer

Expert verified

Using Plant-wide method

Cost per case (Extra Fine) = $10.82

Cost per case (Family Style) = $9.82

Using ABC method

Cost per case (Extra Fine) = $20.02

Cost per case (Family Style) =$7.98

Step by step solution

Meaning of Plant-wide Overhead Rate

Plant-wide overhead is a rate used by the business organizations to allocate the total overheads cost to various products by a single cost pool.

Calculation of requirement 1

$\begin{array}{rcl} Total overhead cost & = & Department 1 total overhead cost + Department 2 total overhead cost + Total overhead cost \\ = & $ 128, 250 + $ 268, 000 + $ 182, 000 \\ = & $ 578, 250 \end{array}$

\begin{array}{rcl} Plantwide overhead allocation rate based on cases & = & \frac{Total overhead cost}{Total number of cases} \\ = & \frac{$ 578, 250}{20, 000 + 100, 000} \\ = & $ 4.82 \end{array}

$\begin{array}{rcl} Total overhead cost for Extra Fine & = & Plantwide rate \times No . of cases for Extra Fine \\ = & $ 4.82 \times 20, 000 \\ = & $ 96, 400 \end{array}$

$\begin{array}{rcl} Total overhead cost for Family Style & = & Plantwide rate \times No . of cases for Family Style \\ = & $ 4.82 \times 100, 000 \\ = & $ 482, 000 \end{array}$

Calculation of requirement 2

$\begin{array}{rcl} Total cost per case for Extra Fine & = & Direct Material and Direct Labor cost per case + Plantwide Overhead Cost per case \\ = & $ 6 + $ 4.82 \\ = & $ 10.82 \end{array}$

$\begin{array}{rcl} Total cost per case for Family Style & = & Direct Material and Direct Labor cost per case + Plantwide Overhead Cost per case \\ = & $ 5 + $ 4.82 \\ = & $ 9.82 \end{array}$

Calculation of requirement 3

$\begin{array}{rcl} Gross Profit case for Extra Fine & = & Market price per case - Total Cost per case \\ = & $ 18 - $ 10.82 \\ = & $ 7.18 \end{array}$

$\begin{array}{rcl} Gross Profit case for Family Style & = & Market price per case - Total Cost per case \\ = & $ 9 - $ 9.82 \\ = & $ 0.82 \end{array}$

By looking at the data, it is concluded that product line 1 is a profitable product and product line 2 is not a profitable product. The company recovered the loss of product line 2 from product line 1.

Calculation of requirement 4

Computation of total cost per case for Extra Fine

$\begin{array}{rcl} Mixing cost per case & = & \frac{Total cost}{Total machine hour} \times \frac{Total Machine hour by Extra Fine}{Total Extra Fine cases} \\ = & \frac{$ 4, 500}{1, 500} \times \frac{500}{20, 000} \\ = & $ 0.075 \end{array}$

$\begin{array}{rcl} Cooking cost per case & = & \frac{Total cost}{Total machine hour} \times \frac{Total Machine hour by Extra Fine}{Total Extra Fine cases} \\ = & \frac{$ 11, 250}{1, 500} \times \frac{500}{20, 000} \\ = & $ 0.1875 \end{array}$

$\begin{array}{rcl} Product testing cost per case & = & \frac{Total cost}{Total no . of batches} \times \frac{Total no . of batches by Extra Fine}{Total Extra Fine cases} \\ = & \frac{$ 112, 500}{600} \times \frac{200}{20, 000} \\ = & $ 1.875 \end{array}$

$\begin{array}{rcl} Machine calibration cost per case & = & \frac{Total cost}{Total production run} \times \frac{Total production run by Extra Fine}{Total Extra Fine cases} \\ = & \frac{$ 250, 000}{400} \times \frac{200}{20, 000} \\ = & $ 6.25 \end{array}$

$\begin{array}{rcl} Labeling cost per case & = & \frac{Total cost}{Total cases of output} \\ = & \frac{$ 12, 000}{120, 000} \\ = & $ 0.1 \end{array}$

$\begin{array}{rcl} Defects cost per case & = & \frac{Total cost}{Total cases of output} \\ = & \frac{$ 6, 000}{120, 000} \\ = & $ 0.05 \end{array}$

$\begin{array}{rcl} Receipts formulation cost per case & = & \frac{Total cost}{Total focus groups} \times \frac{No . of focus groups by Extra Fine}{Total no of cases by Extra Fine} \\ = & \frac{$ 90, 000}{45} \times \frac{30}{20, 000} \\ = & $ 3 \end{array}$

$\begin{array}{rcl} Heat, lights, and water cost per case & = & \frac{Total cost}{Total machine hour} \times \frac{No . of machine hour by Extra Fine}{Total no . of cases by Extra Fine} \\ = & \frac{$ 27, 000}{1, 500} \times \frac{500}{20, 000} \\ = & $ 0.45 \end{array}$

$\begin{array}{rcl} Material Handling cost per case & = & \frac{Total cost}{No . of container types} \times \frac{No . of container types by Extra Fine}{Total no . of cases by Extra Fine} \\ = & \frac{$ 65, 000}{8} \times \frac{5}{20, 000} \\ = & $ 2.03 \end{array}$

Total Cost per case for Extra Fine = Direct Material and Direct Labor Cost + Total Overhead Cost for Extra Fine

= $6 + ($0.075+$0.1875+$1.875+$6.25+$0.1+$0.05+

$3+$0.45+$2.03)

= $20.02

Computation of total cost per case for Family Style

$\begin{array}{rcl} Mixing cost per case & = & \frac{Total cost}{Total machine hour} \times \frac{Total Machine hour by Family Style}{Total Family Style cases} \\ = & \frac{$ 4, 500}{1, 500} \times \frac{1, 000}{100, 000} \\ = & $ 0.03 \end{array}$

$\begin{array}{rcl} Cooking cost per case & = & \frac{Total cost}{Total machine hour} \times \frac{Total Machine hour by Family Style}{Total Family Style cases} \\ = & \frac{$ 11, 250}{1, 500} \times \frac{1, 000}{100, 000} \\ = & $ 0.075 \end{array}$

$\begin{array}{rcl} Product testing cost per case & = & \frac{Total cost}{Total no . of batches} \times \frac{Total no . of batches by Family Style}{Total Family Style cases} \\ = & \frac{$ 112, 500}{600} \times \frac{400}{100, 000} \\ = & $ 0.75 \end{array}$

$\begin{array}{rcl} Machine calibration cost per case & = & \frac{Total cost}{Total production run} \times \frac{Total production run by Family Style}{Total Family Style cases} \\ = & \frac{$ 250, 000}{400} \times \frac{200}{100, 000} \\ = & $ 1.25 \end{array}$

$\begin{array}{rcl} Labeling cost per case & = & \frac{Total cost}{Total cases of output} \\ = & \frac{$ 12, 000}{120, 000} \\ = & $ 0.1 \end{array}$

$\begin{array}{rcl} Defects cost per case & = & \frac{Total cost}{Total cases of output} \\ = & \frac{$ 6, 000}{120, 000} \\ = & $ 0.05 \end{array}$

role="math" localid="1654145615056" $\begin{array}{rcl} Receipts formulation cost per case & = & \frac{Total cost}{Total focus groups} \times \frac{No . of focus groups by Family Style}{Total no . of cases by Family Style} \\ = & \frac{$ 90, 000}{45} \times \frac{15}{100, 000} \\ = & $ 0.3 \end{array}$

$\begin{array}{rcl} Heat, lights, and water cost per case & = & \frac{Total cost}{Total machine hour} \times \frac{No of machine hour by Family Style}{Total no . of cases by Family Style} \\ = & \frac{$ 27, 000}{1, 500} \times \frac{1, 000}{100, 000} \\ = & $ 0.18 \end{array}$

$\begin{array}{rcl} Material handling cost per case & = & \frac{Total cost}{No . of container types} \times \frac{No . of container types by Family Style}{Total no . of cases by Family Style} \\ = & \frac{$ 65, 000}{8} \times \frac{3}{100, 000} \\ = & $ 0.24375 \end{array}$

_T_{otal Cost per case for Extra Fine = Direct Material and Direct Labor Cost + Total Overhead Cost for Extra Fine}

_{= $5+($0.03+$0.75+$0.75+$1.25+$0.1+$0.05+$0.3+$0.18+$0.24}₎

_{= $7.98}

Calculation of requirement 5

$\begin{array}{rcl} Gross Profit per case for Extra Fine & = & Market price per case - Total Cost per case \\ = & $ 18 - $ 20.02 \\ = & - $ 2.02 \end{array}$

$\begin{array}{rcl} Gross Profit per case for Family Style & = & Market price per case - Total Cost per case \\ = & $ 9 - $ 7.98 \\ = & $ 1.02 \end{array}$

By looking at the data, it is concluded that product line 2 is a profitable product and product line 1 is not a profitable product. The company can recover the loss that arises from product line 1 from product line 2.

Calculation of requirement 6

Computation of total cost per case for Extra Fine

$\begin{array}{rcl} Department 1 cost per case & = & \frac{Total cost}{Total machine hour} \times \frac{Total Machine hour by Extra Fine}{Total Extra Fine cases} \\ = & \frac{$ 128, 250}{1, 500} \times \frac{500}{20, 000} \\ = & $ 2.1375 \end{array}$

$\begin{array}{rcl} Department 2 cost per case & = & \frac{Total cost}{Total cases} \\ = & \frac{$ 268, 000}{120, 000} \\ = & $ 2.23 \end{array}$

$\begin{array}{rcl} Receipts formulation cost per case & = & \frac{Total cost}{Total focus groups} \times \frac{No . of focus groups by Extra Fine}{Total no . of cases by ExtraFine} \\ = & \frac{$ 90, 000}{45} \times \frac{30}{20, 000} \\ = & $ 3 \end{array}$

$\begin{array}{rcl} Material handling cost per case & = & \frac{Total cost}{No . of container types} \times \frac{No . of container types by Extra Fine}{Total no . of cases by Extra Fine} \\ = & \frac{$ 65, 000}{8} \times \frac{5}{20, 000} \\ = & $ 2.03 \end{array}$

_{Total Cost per case for Extra Fine = Direct Material and Direct Labor Cost + Total Overhead Cost for Extra Fine}

_{= $6+($2.1375+$2.23+$3+$6.25+$0.45+$2.03)}

_{= $22.1}

_{Computation of total cost per case for Family Style}

_{$\begin{array}{rcl} Department 1 cost per case & = & \frac{Total cost}{Total machine hour} \times \frac{Total machine hour by Family Style}{Total Family Style cases} \\ = & \frac{$ 128, 250}{1, 500} \times \frac{1, 000}{100, 000} \\ = & $ 0.855 \end{array}$}

$\begin{array}{rcl} Department 2 cost per case & = & \frac{Total cost}{Total cases} \\ = & \frac{$ 268, 000}{120, 000} \\ = & $ 2.23 \end{array}$

$\begin{array}{rcl} Receipts formulation cost per case & = & \frac{Total cost}{Total focus groups} \times \frac{No . of focus groups by Family Style}{Total no . of cases by Family Style} \\ = & \frac{$ 90, 000}{45} \times \frac{15}{100, 000} \\ = & $ 0.3 \end{array}$

$\begin{array}{rcl} Heat, lights, and water cost per case & = & \frac{Total cost}{Total machine hour} \times \frac{No . of machine hour by Family Style}{Total no . of cases by Family Style} \\ = & \frac{$ 27, 000}{1, 500} \times \frac{1, 000}{100, 000} \\ = & $ 0.18 \end{array}$

$\begin{array}{rcl} Material handling cost per case & = & \frac{Total cost}{No . of container types} \times \frac{No . of container types by Family Style}{Total no . of cases by Family style} \\ = & \frac{$ 65, 000}{8} \times \frac{3}{100, 000} \\ = & $ 0.24375 \end{array}$

_{Total Cost per case for Extra Fine = Direct Material and Direct Labor Cost + Total Overhead Cost for ExtraFine}

_{= $5+($0.855+$2.23+$0.3+$0.18+$0.24)}

_{= $8.81}

No, the pricing analysis would not improve if the company used a departmental rate as the cost per case would increase in both cases.

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	Assembly	Finishing
Manufacturing overhead costs	\(1,200,000	\)600,000
Direct labor hours	12,000 DLH	20,000 DLH
Machine hours	6,000 MH	16,000 MH

Short Answer

Step by step solution

Meaning of Plant-wide Overhead Rate

Calculation of requirement 1

Calculation of requirement 2

Calculation of requirement 3

Calculation of requirement 4

Calculation of requirement 5

Calculation of requirement 6

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