1. Using NRU’s current product costing system. a. Determine the company’s predet

Question

1. Using NRU’s current product costing system.

a. Determine the company’s predetermined overhead rate using direct labor cost as the single cost drive

b.Determine the full product costs and selling prices of one pound of Salted Almonds and one pound of Sugar Roasted almonds

2. Using an activity-based costing approach, develop a new product cost for one pound of salted almonds and one pound of Sugar Roasted almonds. Allocate all overhead costs to the 100,000 pounds of salted and the 2,000 pounds of Sugar roasted.

Almonds R Us (ARU) processes and sells almonds. ARU buys almonds from California and roasts, seasons, and packages them for resale. Currently the firm offers 2 different types of almonds to gourmet shops in one-pound bags. The major cost is direct materials; however, a substantial amount of factory overhead is incurred in the predominantly automated roasting and packing process. ARU prices its nuts at full product cost, including allocated overhead, plus a markup of 30% Data for the current budget include factory overhead of $3,150,000, which has been allocated by its current costing system on the basis of each product's direct labor cost. The budgeted direct labor cost for the current year totals $600,000. The firm budgeted $6,000,000 for purchases and use of direct materials (mostly raw almonds). The budgeted direct costs for one-pound bags of two of the company's almond products are as follows: Direct materials Direct labor Salted Sugar Roasted $3.25 0.40 $4.15 0.40 Analysis of the current year's budgeted factory overhead costs is as follows: Activity Purchasing Materials handling Quality control Roasting Cost Driver Purchase orders Setups Budgeted Activity Budgeted Cost $579,000 768,600 195,840 961,160 336,000 26,000 309,400 $3,150,000 1,158 1,800 720 96,116 33,600 Roasting-hours Seasoning-hours Packaging-hours Packaging Total factory overhead cost Data regarding the current year's production of two of its lines, Salted and Sugar Roasted, follow. There is no beginning or ending direct materials inventory for either of these nut styles. Budgeted sales Batch size Setups Purchase order size Roasting time Seasoning time Packaging time Salted 100,000 pounds 10,000 pounds 4 per batch 25,000 pounds Sugar Roasted 2,000 pounds 500 pounds 4 per batclh 500 pounds hour per 100 pounds 1 hour per 100 pounds 0.5 hour per 100 pounds 0.1 hour per 100 pounds 0.5 hour per 100 pounds 0.1 hour per 100 pounds 1. Using NRU's current product costing system a Determine the company's predetermined overhead rate using direct labor cost as the single cost driver b. Determine the full product costs and selling prices of one pound of Salted almonds and one pound of Sugar Roasted almonds. 2. Using an activity-based costing approach, develop a new product cost for one pound of Salted almonds and one pound of Sugar Roasted almonds. Allocate all overhead costs to the 100,000 pounds of Salted and the 2,000 pounds of Sugar Roasted.

Explanation / Answer

(1a) Predetermined overhead rate using direct-labor as single cost driver:

Total Manufacturing Overhead cost / Budgeted Direct Labour Cost

$3150000/$600000 = $5.25 per direct labour dollar

(1b) Determine the full product costs and selling prices of one pound of Salted Almonds and one pound of Sugar Roasted almonds:-

Salted

Sugar Roasted

Direct Material

4.15

3.25

Direct Labour

0.40

0.40

Overhead

(0.40 * 5.25)

=2.10

(0.40 * 5.25)

=2.10

Full Product Cost

6.65

5.75

Markup (30%)

2.0

1.73

Selling Price

8.65

7.48

(2) Activity Based costing :-

Activity

Cost Driver

Budgeted Activity (A)

Budgeted Cost

(B)

Cost/Activity

(B/A)

Purchasing

Purchase Orders

1158

579000

500

Material Handling

Setups

1800

768600

427

Quality Control

Batches

720

195840

272

Roasting

Roasting Hrs

96116

961160

10

Seasoning

Seasoning Hrs

33600

336000

10

Packaging

Packaging Hrs

26000

309400

11.9

Salted

Sugar Roasted

Calculations

Direct Material

4.15

3.25

Direct Labour

0.40

0.40

Overhead :-

Purchasing

0.02

1.00

(500 x 4 order) / 100000 = 0.02

(500 x 4 order) / 2000 = 1.00

Material Handling

0.17

3.42

(427 x 40 setups) / 100000 = 0.17

(427 x 16 setups) / 2000 = 3.42

Quality Control

0.027

0.54

(272 x 10 batches) / 100000 = 0.027

(272 x 4 batches) / 2000 = 0.54

Roasting

0.10

0.10

(10 x 1000 hrs) / 100000 = 0.10

(10 x 20 hrs) / 2000 = 0.10

Seasoning

0.05

0.05

(10 x 500 hrs) / 100000 = 0.05

(10 x 10 hrs) / 2000 = 0.05

Packaging

0.012

0.012

(11.9 x 100 hrs) / 100000 = 0.012

(11.9 x 2 hrs) / 2000 = 0.012

Full Product Cost

4.929

8.772

Purchase Orders = 100000 / 25000 = 4 orders

                          2000 / 500 = 4 orders

Setups = (100000/10000) * 4 = 40 setups

            (2000/500) * 4 = 16 setups

Batches = (100000/10000) = 10 batches

                (2000/500) = 4 batches

Roasting Hrs = (100000/100 pound) * 1 = 1000 hrs

                   (2000/100) * 1 = 20 hrs

Salted

Sugar Roasted

Direct Material

4.15

3.25

Direct Labour

0.40

0.40

Overhead

(0.40 * 5.25)

=2.10

(0.40 * 5.25)

=2.10

Full Product Cost

6.65

5.75

Markup (30%)

2.0

1.73

Selling Price

8.65

7.48

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