Question

IcyPop Inc. is an ice cream manufacturing company. It produces two major types of ice-cream products: FruityGo and BerryWafers. You have been brought on as an Analyst, with your first task being to ascertain the most appropriate method of assigning overhead costs to its FruityGo and BerryWafers products. The following information relates to these products for the year just ended for its two main production departments. Mixing Packaging
Budgeted Overhead $400,000 $80,000
Budgeted Direct Labour Hours:
FruityGo 1,000 5,000
BerryWafers 4,000 15,000
Budgeted Machine Hours:
FruityGo 3,500 3,000
Berrywafers 1,500 2,000

30,000 units of FruityGo and 50,000 units of BerryWafers were actually produced in this budget year.

(a) Calculate the pre-determined plantwide overhead rate based on direct labour hours, and the per unit overhead cost for FruityGo and BerryWafers products using the predetermined plantwide overhead rate you just calculated.
(b) Calculate the pre-determined departmental overhead rates based on machine hours for Mixing and labour hours for Packaging, and recalculate the per unit overhead cost for FruityGo and BerryWafers based on these new pre-determined rates.
(c) Which would be the better overhead allocation (plantwide or departmental) for IcyPop? Justify your answer by considering comparative merits of the two approaches, and evidence from the calculations you completed in parts (a) and (b).

Answer 1

(a) Pre-determined plantwide overhead rate = Total budgeted overheads/Total budgeted direct labor hours = ($400000 + $80000)/(1000 + 5000 + 4000 + 15000) = $480000/25000 = $19.20 per direct labor hour

	Fruity Go	BerryWafers
Direct labor hours	6000	19000
Pre-determined plantwide overhead rate $	19.20	19.20
Total overheads $	115200	364800
Number of units produced	30000	50000
Per unit overhead cost $	3.84	7.30

Note: The per unit overhead cost is rounded off to 2 decimal places in absence of instruction regarding the same. Kindly round off as required.

(b)

	Mixing	Packaging
Budgeted overheads $	400000	80000
Budgeted machine hours (3500 + 1500)	5000	-
Budgeted direct labor hours (5000 + 15000)	-	20000
Pre-determined departmental overhead rate $	80.00	4.00
	per MH	per DLH

	Fruity Go	BerryWafers
Mixing department overheads:
Budgeted machine hours	3500	1500
Pre-determined departmental overhead rate $	80.00	80.00
Mixing department overheads $	280000	120000
Packaging department overheads:
Budgeted direct labor hours	5000	15000
Pre-determined departmental overhead rate $	4.00	4.00
Packaging department overheads$	20000	60000
Total overheads	300000	180000
Number of units produced	30000	50000
Per unit overhead cost $	10.00	3.60

(c) Departmental overhead rate allocation would be better for Icy Pop Inc. as compared to the plantwide overhead rate allocation. This is mainly due to the advantage of using departmental overhead rates where each product is allocated overheads according to its resource utilization in each department. Since machine hours utilized by FruityGo in Mixing department are higher than those utilized by BerryWafers, higher allocation of mixing department overheads is made to FruityGo. Similarly, since the direct labor hours utilized by BerryWafers in Packaging department are higher, higher allocation of packaging department overheads is made to BerryWafers. Proper overhead allocation helps in a more realistic computation of product costs and thus product pricing.