New West Chemicals Ltd. engineers industrial cleaners. The two major chemicals t

Question

New West Chemicals Ltd. engineers industrial cleaners. The two major chemicals that it produces are MLX and XLZ. The company uses an activity-based costing system with three cost pools. Below are the budgeted costs and activity levels for the year: Process line costs of $1,248,000 consist of all costs required to maintain and run the equipment used to produce the chemicals. New West uses total machine hours for all equipment on the line as the cost driver. Total machine hours for the year were 12,000 » Each production run for the company required between two and four hours to set up the process flow. The total cost for the year was $1,092,000, and total setup hours were 800 A research and development (R&D;) team of chemical engineers was on staff to ensure that the process was streamlined and within government guidelines. The cost pool consisted of employee salaries, equipment and testing laboratory costs. Total cost for the year was $980,000, which was applied to product lines based on 2,500 hours of R&D; time . The following activities occurred for the year for each product MLX XLZ Total litres produced Litres per batch Process machine hours per batch Setup hours per batch Research and development hours 100,000 1,000 36 2 1,500 75,000 500 56 4 1,000 Total direct costs were $450,000 for MLX and $600,000 for XLZ 4. Which of the following is the correct cost per litre for each product (rounded to the nearest cent)? a) MLX: $8.71; XLZ: $16.35 b) MLX: $12.35; XLZ: $27.79 c) MLX: $13.21; XLZ: $24.35 d) MLX: $16.85; XLZ: $35.79

Explanation / Answer

Answer is D. MLX: 16.85 and XLZ: 35.79 STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL Activity Total Expected Activity ACTIVITY COST POOL Measures Overheads Activity Rate Process line cost MH 1,248,000 12,000 104.00 Setup cost Setups 1,092,000 800 1,365.00 R& D cost R&D hours 980,000 2,500 392.00 Unit cost: MLX XLZ Total Ltrs 100000 75000 Litrs per batch 1000 500 Bathces 100 150 Processing hours 3600 8400 Setup hours 200 600 Direct cost 450000 600000 OH cost: Process line cost @ 104 374400 873600 Setup cost @ 1365 273000 819000 R&D cost @ 392 588000 392000 Total cost 1685400 2684600 Number of ltrs 100000 75000 Cost per unit 16.854 35.79467

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