Question

Almonds R Us (ARU) processes and sells almonds. ARU buys almonds from California and roasts, seasons, and packages them for resale. Currently the firm offers 2 different types of almonds to gourmet shops in one-pound bags. The major cost is direct materials; however, a substantial amount of factory overhead is incurred in the predominantly automated roasting and packing process.

ARU prices its nuts at full product cost, including allocated overhead, plus a markup of 30%.

Data for the current budget include factory overhead of $3,110,000, which has been allocated by its current costing system on the basis of each product’s direct labor cost. The budgeted direct labor cost for the current year totals $600,000. The firm budgeted $6,000,000 for purchases and use of direct materials (mostly raw almonds).

The budgeted direct costs for one-pound bags of two of the company’s almond products are as follows:

	Salted	Sugar Roasted
Direct materials	$4.20	$3.15
Direct labor	0.40	0.30

Analysis of the current year’s budgeted factory overhead costs is as follows:

Activity	Cost Driver	Budgeted Activity	Budgeted Cost
Purchasing	Purchase orders	1,158	$579,000
Materials handling	Setups	1,764	739,557
Quality control	Batches	720	195,840
Roasting	Roasting-hours	96,000	960,000
Seasoning	Seasoning-hours	33,630	326,203
Packaging	Packaging-hours	26,000	309,400
Total factory overhead cost			$3,110,000

Data regarding the current year’s production of two of its lines, Salted and Sugar Roasted, follow. There is no beginning or ending direct materials inventory for either of these nut styles.

	Salted	Sugar Roasted
Budgeted sales	100,000 pounds	2,000 pounds
Batch size	10,000 pounds	500 pounds
Setups	3 per batch	3 per batch
Purchase order size	25,000 pounds	500 pounds
Roasting time	1 hour per 100 pounds	1 hour per 100 pounds
Seasoning time	0.5 hour per 100 pounds	0.5 hour per 100 pounds
Packaging time	0.1 hour per 100 pounds	0.1 hour per 100 pounds

1. Using ARU’s current product costing system,
   1. Determine the company’s predetermined overhead rate using direct labor cost as the single cost driver.
   2. Determine the full product costs and selling prices of one pound of Salted almonds and one pound of Sugar Roasted almonds.
2. Using an activity-based costing approach, develop a new product cost for one pound of Salted almonds and one pound of Sugar Roasted almonds. Allocate all overhead costs to the 100,000 pounds of Salted and the 2,000 pounds of Sugar Roasted.

Answer 1

Solution:

Predetermined Overhead rate	= Total Overhead / Total Labour Cost
	=3110000/600000
	5.18
	Sugar Roasted	Salted
Direct Materials	3.15	4.2
Direct Labor	0.3	0.4
Manufacturing Overheads	1.55	2.07
Per unit Cost	5.00	6.67
Selling Price (Cost + 30%)	6.51	8.67

2.

	Sugar Roasted	Salted	Budgeted Activity	Budgeted Cost	Cost Per Activity	Sugar Roasted	Salted
Budgeted Sales	2000	100000
Batch Size	500	10000
No of batches	2000/500	100000/10000
No of batches	4	10	720	195840	272.00	1088.00	2720.00
SetUps	3 per batch	3 per batch
	4*3	10*3
SetUps	12	30	1764	739557	419.25	5031.00	12577.50
Purchase Order Size	4	4	1158	579000	500.00	2000.00	2000.00
Roasting time	1 hr per 100 lb	1 hr per 100 lb
	=1*(2000/100)	=1*(10000/100)
Roasting time	20	1000	96000	960000	10.00	200.00	10000.00
Seasoning Time	.5 hr per 100 lb	.5 hr per 100 lb
	=.5*(2000/100)	=.5*(10000/100)
Seasoning Time	10	500	33630	326203	9.70	97.00	4850.00
Packing Time	.1hr per 100 lb	.1 hr per 100 lb
	=..1*(2000/100)	=.1*(10000/100)
Packing Time	2	100	26000	309400	11.90	23.80	1190.00
Total Allocated Overheads				3110000		8439.80	33337.50
Overhead per Unit						8439.80/2000	33337.50/100000
						4.22	0.33

ABC Costing	Sugar Roasted	Salted
Direct Materials	3.15	4.2
Direct Labor	0.3	0.4
Manufacturing Overheads	4.22	0.33
Per unit Cost	7.67	4.93
Selling Price (Cost + 30%)	9.97	6.41

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