Chapter 4, Problem 5PSA

1.

To determine

To compute:Overhead cost assigned to each case of Extra fine salsa and each case of Family style salsa.

Explanation of Solution

Given below is the table for the calculation of plantwide overhead rate:

Plantwide overhead rate
Particulars	Amount ($)
Total overhead costs:
Department 1	128,250
Department 2	268,000
Support	182,000
Total overhead costs $\left(\text{A}\right)$	578,250
Total units produced:
Extra fine	20,000
Family style	100,000
Total number of cases $\left(\text{B}\right)$	120,000
Plantwide overhead rate $\frac{\left(\text{A}\right)}{\left(\text{B}\right)}$	4.82

Table(1)

Hence, plantwide overhead rate to be assigned to each caseof Extra fine and Family style salsa is $4.82.

2.

To determine

To compute: Total cost per case for the two products.

Explanation of Solution

Given below is the calculation of total cost per case:

Total cost per case
Particulars	Extra fine ($)	Family style ($)
Direct materials and direct labor	6.00	5.00
Overhead	4.82	4.82
Total cost per case	10.82	9.82

Table(2)

Hence, total cost per case of Extra fine is $10.82 and Family style is $9.82.

3.

To determine

To compute: Gross profit per case.

Explanation of Solution

Given below is the computation of gross profit per case of Extra fine and familystyle:

Gross profit per case
Particulars	Extra fine ($)	Family style ($)
Market price	18.00	9.00
Total cost per case	10.82	9.82
Gross profit/loss per case	7.18	(0.82)

Table(3)

• Extra fine product is profitable for the company as it has a gross profit of $7.18 whereas Family style incurs a loss of $0.82.
• The S Company is not advised to produce Family style if market price of the same is not increased or it is not able to lower its cost for producing Family style.

Hence,gross profit per case of extra fine is $7.18 and Gross loss per case of Family style is $ 0.82.

4.

To determine

To compute: Total cost per case using ABC.

Explanation of Solution

Given below is the calculation of total cost per case:

Total cost per case
	Extra fine ($)	Family ($)
Mixing:
Extra fine $\left(500\text{ MH}\times \text{\$3}\text{.00 per MH}\right)$	1,500
Family style $\left(1,000\text{ MH}\times \text{\$3}\text{.00 per MH}\right)$		3,000
Cooking:
Extra fine $\left(500\text{ MH}\times \text{\$7}\text{.50 per MH}\right)$	3,750
Family style $\left(1,000\text{ MH}\times \text{\$7}\text{.50 per MH}\right)$		7,500
Product testing:
Extra fine $\left(200\text{ batches}\times \text{\$187}\text{.50 per batch}\right)$	37,500
Family style $$\left(400\text{ batches}\times \text{\$187}\text{.50 per batch}\right)$$		75,000
Machine calibration:
Extra fine $\left(200\text{ runs}\times \text{\$625 per run}\right)$	125,000
Family style $\left(200\text{ runs}\times \text{\$625 per run}\right)$		125,000
Labeling:
Extra fine $\left(20,000\text{ cases}\times \text{\$0}\text{.10 per case}\right)$	2,000
Family style $\left(100,000\text{ cases}\times \text{\$0}\text{.10 per case}\right)$		10,000
Defects:
Extra fine $\left(20,000\times \text{\$0}\text{.05 per case}\right)$	1,000
Family style $\left(100,000\times \text{\$0}\text{.05 per case}\right)$		5,000
Recipe formulation:
Extra fine $\left(30\text{ groups}\times \text{\$2,000 per group}\right)$	60,000
Family style $\left(\text{15 groups}\times \text{\$2,000 per group}\right)$		30,000
Heat, light and water:
Extra fine $\left(500\text{ MH}\times \text{\$18 per MH}\right)$	9,000
Family style $\left(1,000\text{ MH}\times \text{\$18 per MH}\right)$		18,000
Materials handling
Extra fine $\left(5\text{ container types}\times \text{\$8,125 per type}\right)$	40,625
Family style $\left(\text{3 container types}\times \text{\$8,125 per type}\right)$		24,375
Total overhead cost by product line	280,375	297,875
Number of cases	20,000	100,000
Overhead cost per case	14.02	2.98
Direct materials and direct labor per case	6.00	5.00
Total cost per case	$20.02	$7.98

Table(4)

Working note:

Given below is the calculation of activity rate:

Calculation of activity rate
Activity cost pool	Budgeted cost ($) $\left(\text{A}\right)$	Activity driver $\left(\text{B}\right)$	Activity driver ($) $\frac{\left(\text{A}\right)}{\left(\text{B}\right)}$
Mixing	4,500	1,500	3.00
Cooking	11,250	1,500	7.50
Product testing	112,500	600	187.50
Machine calibration	250,000	400	625.00
Labeling	12,000	120,000	0.10
Defects	6,000	120,000	0.05
Recipe formation	90,000	45	2,000.00
Heat, lights and water	27,000	1,500	18.00
Material handling	65,000	8	8,125.00

Table(5)

Hence, total cost per case of extra fine is $20.02 and Family style is $7.98.

5.

To determine

To compute: Gross profit per case.

Explanation of Solution

Given below is the calculation of gross profit per case:

Gross profit per case
	Extra fine ($)	Family style ($)
Market price	18.00	9.00
Total cost per case	20.02	7.98
Gross profit/loss per case	(2.02)	1.02

• Family style product is profitable for the company as it has a gross profit of $1.02 whereas Extra fine incurs a loss of $2.02.
• The S Company is not advised to produce Extra fine if market price of the same is not increased or it is not able to lower its cost for producing Extra fine.

Hence,gross loss per case of extra fine is $2.02 and gross profit per case of Family style is $1.02.

6.

To determine

To identify: Effect on pricing analysis if Company uses departmental rates over the plantwide overhead rate.

Explanation of Solution

• Use of departmental rates provides differences in the departments; hence it improves the pricing analysis if the company uses departmental rates over plantwide overhead rates.
• Plantwide overhead rate does not give accurate results when the activities in the Company are diverse in nature.
• Activity based costing method allocates the cost of each task to all products and services.
• It is preferable to use activity based costing in companies where more than one product is manufactured or more than one services are provided, for more accurate results.
• Activity based costing helps in better controlling of overhead costs.

Hence, ABC helps in better decision making.