Main Street Ice Cream Company uses a plantwide allocation method to allocate overhead based on direct labor-hours at a rate of $2 per labor-hour. Strawberry and vanilla flavors are produced in Department SV. Chocolate is produced in Department C. Sven manages Department SV and Charlene manages Department C. The product costs (per thousand gallons) follow. Direct labor (per 1,000 gallons) Raw materials (per 1,000 gallons) Strawberry $754 804 Vanilla $ 829 504 Chocolate $1,129 604
Main Street Ice Cream Company uses a plantwide allocation method to allocate overhead based on direct labor-hours at a rate of $2 per labor-hour. Strawberry and vanilla flavors are produced in Department SV. Chocolate is produced in Department C. Sven manages Department SV and Charlene manages Department C. The product costs (per thousand gallons) follow. Direct labor (per 1,000 gallons) Raw materials (per 1,000 gallons) Strawberry $754 804 Vanilla $ 829 504 Chocolate $1,129 604
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:**Educational Content: Cost Allocation in Manufacturing**
### Main Street Ice Cream Company Overview
The Main Street Ice Cream Company employs a plantwide allocation method to distribute overhead costs. This method uses direct labor-hours at a rate of $2 per labor-hour. The company produces the following flavors:
- **Strawberry** and **Vanilla** - Manufactured in Department SV.
- **Chocolate** - Produced in Department C.
**Management:**
- **Department SV** is managed by Sven.
- **Department C** is managed by Charlene.
### Product Costs (Per Thousand Gallons)
| | Strawberry | Vanilla | Chocolate |
|----------------------|------------|---------|-----------|
| Direct labor | $754 | $829 | $1,129 |
| Raw materials | $804 | $504 | $604 |
### Requirements
#### a. Calculate Total Cost Using Plantwide Allocation
- **Labor Hours Per 1,000 Gallons:**
- Strawberry: 55 hours
- Vanilla: 65 hours
- Chocolate: 150 hours
Compute the total cost of 1,000 gallons for each flavor utilizing plantwide allocation.
#### b. Departmental Differences in Overhead Allocation
Charlene, managing an older department, requested a breakdown of overhead costs as follows:
| | Department SV | Department C |
|----------------------|---------------|--------------|
| Overhead | $90,864 | $13,104 |
| Machine-hours | 25,240 | 36,400 |
| Labor-hours | 25,240 | 18,200 |
**Allocation Bases:**
- Department SV: Machine-hours
- Department C: Labor-hours
Compute the allocation rates based on these parameters.
#### c. Determine Cost Using Departmental Allocation Rates
Assess the cost of 1,000 gallons for each flavor using departmental allocation rates (from requirement b). The machine-hours needed per 1,000 gallons are:
- Strawberry: 55 hours
- Vanilla: 65 hours
- Chocolate: 154 hours
Continue using the same direct labor-hours as in requirement (a).
### Explanation of Overhead Allocation Concepts
**Overhead Allocation:** A method to distribute indirect costs to different departments or products. Here, machine-hours and labor-hours serve as bases for distributing these costs.
**Plantwide Rate:** A single overhead rate applied across all products and departments
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