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 signifacntly different factory supporting resources. As a start, the team suggests the following overheadcost pools,cost drivers, and estimated cost driver levels for manufacturing overheads:
Overhead cost pool Cost Driver Estimated cost driver level Budgeted overhead Machine setup Number of setups 100 R 100 000 Materials Handling Number of barrels 800 R 80 000 Quality Control Number of inspections 1000 R 200 000 Other Overhead Cost machine-Hours 10 000 R100 000
CCO has recently completed production of 500 barrels each of P5 and G23. P5 is a cornbased oil distributed primarily through supermarkets . G23 is made from olive oil, flaxseed oil, and other exotic ingredients and sold up to scale restaurants as a gourment food. the production require the following operations:
Overhead cost pool Number of cost drivers Number of cost drivers P5 G23 Machine setups 1 set up 50 set up materials handling 500 barrels 500 barrels Quality Inspections 2 times 20 times Machine hours 1000 hours 1000 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 driversystem suggested by the ABC project team.
3. Critically discuss if the choice of costing system can be important competetive factor of CCO. How can the costing system help firm become more profitable and competitive?
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 signifacntly different factory supporting resources. As a start, the team suggests the following overheadcost pools,cost drivers, and estimated cost driver levels for manufacturing overheads:
| Overhead cost pool | Cost Driver | Estimated cost driver level | Budgeted overhead |
| Machine setup | Number of setups | 100 | R 100 000 |
| Materials Handling | Number of barrels | 800 | R 80 000 |
| Quality Control | Number of inspections | 1000 | R 200 000 |
| Other Overhead Cost | machine-Hours | 10 000 | R100 000 |
CCO has recently completed production of 500 barrels each of P5 and G23. P5 is a cornbased oil distributed primarily through supermarkets . G23 is made from olive oil, flaxseed oil, and other exotic ingredients and sold up to scale restaurants as a gourment food. the production require the following operations:
| Overhead cost pool | Number of cost drivers | Number of cost drivers |
| P5 | G23 | |
| Machine setups | 1 set up | 50 set up |
| materials handling | 500 barrels | 500 barrels |
| Quality Inspections | 2 times | 20 times |
| Machine hours | 1000 hours | 1000 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 driversystem suggested by the ABC project team.
3. Critically discuss if the choice of costing system can be important competetive factor of CCO. How can the costing system help firm become more profitable and competitive?
Related questions
Kinnard Electronics manufactures two home theater systems: theElite which sells for $1,400, and a new model, the Preferred, whichsells for $1,100. The production cost computed per unit undertraditional costing for each model in 2012 was as follows.
Traditional Costing | Elite | Preferred |
Direct materials | $600 | $320 |
Direct labor ($20 per hour) | 100 | 80 |
Manufacturing overhead ($35 per DLH) | 175 | 140 |
Total per unit cost | $875 | $540 |
In 2012, Kinnard manufactured 20,000 units of the Elite and10,000 units of the Preferred. The overhead rate of $35 per directlabor hour was determined by dividing total expected manufacturingoverhead of $4,900,000 by the total direct labor hours (140,000)for the two models. Under traditional costing, the gross profit onthe models was: Elite $525 ($1,400 _ $875), and Preferred $560($1,100 _ $540). Because of this difference, management isconsidering phasing out the Elite model and increasing theproduction of the Preferred model. Before finalizing its decision,management asks Kinnard's controller to prepare an analysis usingactivity-based costing (ABC). The controller accumulates thefollowing information about overhead for the year ended December31, 2012.
Expected | Activity- | |||
Use of | Based | |||
Estimated | Cost | Overhead | ||
Activity | Cost Driver | Overhead | Drivers | Rate |
Purchasing | Number of orders | $ 775,000 | 25,000 | $31 |
Machine setups | Number of setups | 580,000 | 20,000 | 29 |
Machining | Machine hours | 3,100,000 | 100,000 | 31 |
Quality control | Number of inspections | 445,000 | 5,000 | 89 |
The cost drivers used for each product were:
Cost Driver | Elite | Preferred | Total |
Purchase orders | 11,250 | 13,750 | 25,000 |
Machine setups | 11,000 | 9,000 | 20,000 |
Machine hours | 40,000 | 60,000 | 100,000 |
Inspections | 2,750 | 2,250 | 5,000 |
Instructions
(a) Assign the total 2012 manufacturing overhead costs to thetwo products using activitybased costing (ABC).
(b) What was the cost per unit and gross profit of each modelusing ABC costing?
(c) Are management's future plans for the two models sound?Explain.
