Case18 Act

CASE 18-2 ACT 6691

Question 1

Under the old system, the only difference shown between the costs of Polynesian Fantasy and Vanilla ice creams was due to the $.20 difference in direct material costs (see Table 1). The overhead rate was 200% of direct labor dollars ($600,000 ÷ $300,000).

Table 1

Old System Costs

| Polynesian Fantasy | Vanilla |

DM | 2.00 | | 1.80 | |

DL | 1.20 | | 1.20 | |

OH | 2.40 | 1.20 * 200% | 2.40 | 1.20 * 200% |

| 5.60 | | 5.40 | |

| | | | |

The new system costs took some calculating. Table 2 shows the calculation of the cost driver rates. Table 3 uses these rates to calculate the product costs. The total costs for Polynesian Fantasy and Vanilla are $9.07 and $4.64 respectively.

Table 2

New System—Calculate cost drivers

Activity | Budgeted Cost | Activity cost driver | Budgeted activity | Cost driver rate |

Purchasing | $80,000 | Purchase orders | 909 | $88.01 |

Material handling | 95,000 | Setups | 1,846 | 51.46 |

Blending | 122,000 | Blender hrs | 1,000 | 122.00 |

Freezing | 175,000 | Freezer hrs | 1,936 | 90.39 |

Packaging | 110,000 | Packaging machine hrs | 1,100 | 100.00 |

Quality control | 18,000 | Batches | 286 | 62.94 |

Total mfg OH cost | 600,000 | | | |

Table 3

New System—Calculate product costs

| Polynesian Fantasy | Vanilla |

| | | | | | |

Purchasing | (2,000/50) = | 40 | $3,520.40 | (100,000/1,000) = | 100 | $8,801.00 |

Material handling | 3 * (2,000/100) = | 60 | 3,087.76 | 3 * (100,000/2,500) = | 120 | 6,175.20 |

Blending | (36 min * 20) 60= | 12 | 1,464.00 | (18 min * 1,000) 60 = | 300 | 36,600.00 |

Freezing | 1 hr * 20 = | 20 | 1,807.85 | 1 hr * 1,000 = | 1,000 | 90,390.00 |

Packaging | (18 min * 20) 60 = | 6 | 600.00 | (12 min * 1,000) 60 = | 200 | 20,000.00 |

Quality...