Question

Multiple Cost Drivers
Scottsdale Ltd. manufactures a variety of high-volume and low-volume products to customer demand. Presented is information on 2009 manufacturing overhead and activity cost drivers.

Level	Total Cost	Units of Cost Driver
Unit	$300,000	20,000 machine hours
Batch	300,000	1,000 customer orders
Product	100,000	50 products

Product X1 required 2,000 machine hours to fill 10 customer orders for a total of 8,000 units.

(d) Determine the error in the prediction of X1 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 product X1.

Determine the error in the prediction of X1 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 product X1.

Answer 1

SOLUTION:

PARTICULARS	AMOUNT($)
A)BATCH LEVEL COST	300000
B)MACHINE HOURS	20000
C)MACHINE HOUR RATE(A/B)(300000/20000)	15
D)MACHINE HOURS FOR PRODUCT X1	1000
E)TOTAL BATCH LEVEL COST BASED ON MACHINE HOURS(1000*15)	15000
F)BATCH LEVEL COST AS PER ACTIVITY CONSUMED(W.N.)	(3000)
G)OVER PREDICTION	12000

WORKING NOTE:

ACTIVITY RATE

LEVEL	TOTAL COST	TOTAL ACTIVITIES	ACTIVITY DRIVER	RATE
UNIT LEVEL	300000	20000	MACHINE HOUR	15
BATCH LEVEL	300000	1000	CUSTOMER PRODUCTS	300
PRODUCT LEVEL	100000	50	PRODUCTS	2000

TOTAL OVERHEAD COST

LEVEL	TOTAL COST	TOTAL ACTIVITIES	ACTIVITY DRIVER	RATE
UNIT LEVEL	15	2000	MACHINE HOUR	30000
BATCH LEVEL	300	10	CUSTOMER PRODUCTS	3000
PRODUCT LEVEL	2000	1	PRODUCTS	2000
TOTAL				35000