Question

Lettuce Serve manufactures a variety of specialty salad dressings. Production runs are both high-volume and low-volume activities, depending on customer orders. Presented is Lettuce Serve's 2017 general manufacturing costs (manufacturing overhead) and each cost's related activity cost driver.

Level	Total Cost		Units of Cost Driver
Unit	$ 500,000		10,000 machine hours
Batch	50,000		500 customer orders
Product	100,000		25 products

Their cranberry vinaigrette dressing required 3,000 machine hours to fill 10 customer orders for a total of 8,000 units.

(a) Assuming all manufacturing overhead is estimated and predicted on the basis of machine hours, determine the predicted total overhead costs to produce the 8,000 units of cranberry vinaigrette.
$Answer

(b) Assuming manufacturing overhead is estimated and predicted using separate rates for machine hours, customer orders, and products (a multiple-level cost hierarchy), determine the predicted total overhead costs to produce the 8,000 units of cranberry vinaigrette.
$Answer

(c) Calculate the error in predicting manufacturing overhead using machine hours versus using multiple cost drivers. Indicate whether the use of only machine hours results in overpredicting or underpredicting the costs to produce 8,000 units of cranberry vinaigrette.
$Answer

(d) Determine the error in the prediction of cranberry vinaigrette batch-level costs resulting from the use of only machine hours. Indicate whether the use of only machine hours results in overpredicting or underpredicting the batch-level costs of cranberry vinaigrette.
$Answer
(e) Determine the error in the prediction of cranberry vinaigrette product-level costs resulting from the use of only machine hours. Indicate whether the use of only machine hours results in overpredicting or underpredicting the product-level costs of cranberry vinaigrette.
$Answer

 

Answer 1

	WORKING OF ACTIVITY RATES:
	Level	Total Cost	Units of Cost Driver	Activity rate
	Unit	$500,000	10,000 machine hours	$50	per MH
	Batch	50,000	500 customer orders	$                 100	per order
	Product	100,000	25 products	$             4,000	Per product
		$650,000
	OH assingment rate based on machine hour = 650000/10000 = $65 per MH.
a)	Predicted total overhead costs on the basis of machine hours = 3000*$65 =	195000
b)	Predicted overhead costs under multple-level cost hierarchy:
	Machine operation = 3000*$50 =	150000
	Customer order = 10*$100 =	1000
	Product cost = 1*$4000 =	4000
	Predicted overhead costs	155000
c)	Error in prediction = 195000-155000 =	40000	Over prediction
d)	Batch level costs using only machine hours = (50000/10000)*3000 =	15000
	Batch level costs using multiple cost drivers	1000
	Error in prediction = 15000-1000 =	14000	Over prediction
e)	Product level costs using only machine hours = (100000/10000)*3000 =	30000
	Product level costs using multiple cost drivers =	4000
	Error in prediction = 30000-4000 =	26000	Over prediction