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 35%.

Data for the current budget include factory overhead of $3,110,002, 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	$4.30	$3.20
Direct labor	0.40	0.40

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

Activity	Cost Driver	Budgeted Activity	Budgeted Cost
Purchasing	Purchase orders	1,350	$595,998
Materials handling	Setups	1,650	679,998
Quality control	Batches	900	210,006
Roasting	Roasting-hours	97,000	970,000
Seasoning	Seasoning-hours	34,000	342,000
Packaging	Packaging-hours	26,000	312,000
Total factory overhead cost			$3,110,002

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	4 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

Computation of predetermined overhead rate:

A)Predetermined overhead rate = Estimated total manufacturing overhead / estimated direct labor cost

                                                            = $ 31,10,002 / $ 6,00,000

                                                           = $ 5.1833

B)Determination of the full product costs and selling prices of one pound of salted and sugar roasted almonds:

Particulars	Salted	Sugar roasted
Direct materials	$ 4.30	$ 3.20
Direct labor costs	$ 0.40	$ 0.40
Total direct costs	$ 4.70	$ 3.60
Indirect costs
Manufacturing overheads as per direct labor costs	$ 5.18	$ 5.18
Total manufacturing costs per pound	$ 9.88	$ 8.78
Add: Markup @ (35%)	$ 3.45	$ 3.07
Budgeted selling price per pound	$ 13.33	$ 11.85

C) Computation of product costs based on activity based costing.

1. Computation of activity rates

Activity	Activity cost	Activity driver	Activity driver rate
Purchasing	$ 5,95,998	1350 purchase orders (number of purchase orders)	$ 441.48 ($ 5,95,998 / 1350 orders)
Materials handling	$ 6,79,998	1650 setups (number of setups)	$ 412.12 ( $ 6,79,998 / 1650 setups)
Quality control	$ 2,10,006	900 batches (number of batches)	$ 233.34 ($ 2,10,006 / 900 batches)
Roasting	$ 9,70,000	97,000 roasting hours (number of roasting hours)	$ 10.00 ( $9,70,000 / 97000 hrs)
Seasoning	$ 3,42,000	34,000 seasoning hours (number of seasoning hours)	$ 10.05 ($ 3,42,000 / 34,000 hrs)
Packaging	$ 3,12,000	26,000 packaging hours (Number of packaging hours)	$ 12.00 ($ 3,12,000 / 26,000 hrs)

Workings:

Particulars	Salted	Sugar roasted	Notes
Expected sales	1,00,000	2000	A
Batch size	10,000	500	B
Number of batches	10	4	C = A /B
Setups per batch	3	4	D
Number of setups	30	16	E = C *D
Purchase order size	25,000 pounds	500 pounds	F
Purchase orders	4 orders	4 orders	G = A / F
Roasting time per 100 pounds	1 hour	1 hour	H
Roasting hours	1000 hours	20 hours	I = (A / 100) * H
Seasoning time per 100 pounds	0.5 hours	0.5 hours	J
Seasoning hours	500 hours	10 hours	K = (A /100) * J
Packaging time per 100 pounds	0.1 hours	0.1 hours	L
Packaging hours	100 hours	2 hours	M= (A /100)* L

Computation of overhead cost assigned to the below products as per activity based costing

Particulars	Salted	Sugar roasted
Purchasing	$ 1765.92 (4 orders*$ 441.48)	$ 1765.92 (4 orders*$ 441.48)
Materials handling	$ 12,363.60 (30 setups*$ 412.12)	$ 6594.02 (16 setups*$ 412.12)
Quality control	$ 2,333.40 (10 batches *$ 233.34)	$ 933.36 ( 4 batches *$ 233.34)
Roasting	$ 10,000 (1000 hours*$ 10.00)	$ 200 (20 hours*$ 10.00)
Seasoning	$ 5,025 (500 hrs*$ 10.05)	$ 100.50 (10 hrs*$ 10.05)
Packaging	$ 1200 (100 hours* $ 12)	$ 24.00 (2 hours*$ 12.00)
Total overheads assigned	$ 32,688.02	$ 9,617.79

Computation of product cost based on activity based costing

Particulars	Salted	Sugar roasted
Direct materials	$ 4,30,000 (1,00,000 pounds*$ 4.30)	$ 6400 (2000 pounds*$ 3.20)
Direct labor	$ 40,000 ($ 1,00,000 *0.40)	$ 800 ($ 2000 *0.40)
Total direct costs	$ 4,70,000 ($ 4,30,000+$ 40,000)	$ 7,200 ($ 6,400 +$ 800)
Manufacturing overheads assigned	$ 32,688.02	$ 9,617.79
Total manufacturing cost	$ 5,02,688.02 ( $ 4,70,000 + $ 32,688.02)	$ 16,817.79 ($ 7,200+$ 9,617.79)
Add : Markup 35 %	$ 1,75.940.80	$ 5886.22
Budgeted selling price (A)	$ 6,78,628.82	$ 22,704.01
Number of pounds (B)	100000 pounds	2000 pounds
Budgeted selling price per pound (A /B)	$ 6.786	$ 11.35