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Required information

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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.

Additional production information about its two product lines follows.

4. Using ABC, compute the total cost per case for each product type if the direct labor and direct materials cost is $9 per case of Extra Fine and $6 per case of Family Style. (Round your intermediate calculations to 2 decimal places. Round "Activity Rate" and "Overhead cost per unit" answers to 2 decimal places.)

Process Activity Overhead cost Driver Quantity Department 1 Mixing $ 5,100 Machine hours 1,500 Cooking 10,800 Machine hours 1,500 Product testing 113,100 Batches 1,000 $ 129,000 Department 2 Machine calibration $ 280,000 Production runs 700 Labeling 10,000 Cases of output 145,000 Defects 4,500 Cases of output 145,000 $ 294,500 Support Recipe formulation $ 96,000 Focus groups 75 Heat, lights, and water 33,000 Machine hours 1,500 Materials handling 71,000 Container types 8 $ 200,000

Explanation / Answer

This is Activity based costing, so Let us start with calculating the individual activity driver rate but before that let us clearly identify the cost drivers viz. 1) Machine hours 2)Batches 3)Production runs 4)cases of output 5)Focus groups 6)Container types.

Make sure, that the parameters given in the additional information to calculate the product cost consists of above cost drivers.

Now let us proceed to find the activity driver rate.

1) Machine Hours

  Total Machine hours given --- 1500 hours (denoted by MH)

Related activities - i)Mixing ii) Cooking iii) Heat, light, water

Total overhead cost apportioned for all the three = 5100+10800+33000 = $48900

Hence, rate per machine hour = 48900/1500 = $32.6/MH

2)Batches

Total batches given = 1000

Related activity - Product Testing

Overhead cost apportioned for the related activity = $ 113100

Hence rate per batch = 113100/1000 = $113.1 per batch

Similary

3)Production runs :

Related activity is Machine Calibration and hence Rate per production run = $280000/700 = $400 per production run

4)Cases of output

Related activities are i) Labeling and ii)Defects and the aggregate overhead cost apportioned is $10000+$4500 i.e. $14500 while the total cases of output is 145000

Hence the rate per case of output would be 14500/145000 = $0.1 per case of output

5)Focus groups

Related activity is Recipe formulation and hence the rate per focus group would be 96000/75 i.e. $1280 per group

6)Container types

Related activity is Material handling and hence the rate per container type would be 71000/8 i.e. $8875 per type.

Let us proceed to calculated the product cost now

Extra Fine Family Style

Cost driver Quantity Rate Total cost Quantity Rate Total Cost Batches 260 113.1 29406 740 113.1 83694 Machine hours 550 32.6 17930 950 32.6 30970 Focus groups 50 1280 64000 25 1280 32000 Container types 5 8875 44375 3 8875 26625 Production runs 260 400 104000 440 400 176000 Total Cost 259711 349289 No. of units (given) 26000 119000 So, Cost per unit 9.98 2.93 Direct labour and
Direct material cost
(Given) 9 6 Total cost per unit 18.98 8.93

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