Question

Rosehut Olive Oil Company makes two grades of olive oil: standard and extra virgin. Rosehut has identified two activity cost pools, the related costs per pool, the cost driver for each pool, and the expected usage for each pool.

Activity

Total Activity Cost

Cost Driver

Standard

Extra Virgin

Washing, Pressing & Filtering (WPF)

$

1,673,150

Washing, Pressing, and Filtering hours

46,400

hours

107,100

hours

Bottling

$

706,500

Number of bottles

314,000

bottles

78,500

bottles

Additional information about each grade of olive oil is as follows:

Grade	Sales Revenue				Direct Materials Costs				Direct Labor Costs
Standard	$	5,135,000			$	900,000			$	375,000
Extra Virgin	$	2,450,000			$	600,000			$	150,000

Required:

1. Calculate the activity rate for each cost pool.

2. Using the activity rates, determine the total amount of overhead assigned to each product.

3. Determine total manufacturing cost for each product.

4. Calculate the gross profit for each product.

Answer 1

• [1]

Activity	Total activity cost	Cost driver total	Activity rates
WPF	$1,673,150	153500	$10.90
Bottling	$706,500	392500	$1.80

• [2]

	Activity rates	Standard		Extra Virgin
		Cost drivers	Overhead allocated	Cost drivers	Overhead allocated
WPF	$10.90	46400	$505,760	107100	$1,167,390
Bottling	$1.80	314000	$565,200	78500	$141,300
Total amount of Overhead assigned			$1,070,960		$1,308,690

• [3]

	Standard	Extra Virgin
Direct materials cost	$900,000	$600,000
Direct Labor Cost	$375,000	$150,000
Overhead cost allocated	$1,070,960	$1,308,690
Total manufacturing Cost	$2,345,960	$2,058,690

• [4]

	Standard	Extra Virgin
Sales revenue	$5,135,000	$2,450,000
Total manufacturing Cost	$2,345,960	$2,058,690
Gross Profits	$2,789,040	$391,310