Question

Newman’s Own manufactures a variety of specialty salad dressings. Production runs are both high-volume and low-volume activities, depending on customer orders. Assume the following represents general manufacturing costs (manufacturing overhead) and each cost’s related activity cost driver for Newman’s Own.

Level	Total Cost		Units ofCost Driver
Unit	$ 600,000		20,000 machine hours
Batch	40,000		400 customer orders
Product	84,000		15 products

The lime vinaigrette dressing required 1,000 machine hours to fill 60 customer orders for a total of 4,000 cases.

Note: Do not use negative signs with any of your answers.

(a) Assuming all manufacturing overhead is estimated and predicted on the basis of machine hours, determine the predicted total overhead costs to produce the 4,000 cases of lime 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 4,000 cases of lime 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 4,000 cases of lime vinaigrette.
$Answer AnswerOver-predictionUnder-prediction

(d) Looking just at batch level costs, calculate the error in predicting those costs using machine hours versus using customer orders. Indicate whether the use of only machine hours results in overpredicting or underpredicting the batch-level costs to produce 4,000 cases of lime vinaigrette.
$Answer AnswerOver-predictionUnder-prediction

(e) Looking just at product-level costs, calculate the error in predicting those costs using machine hours versus using number of products. Indicate whether the use of only machine hours results in overpredicting or underpredicting the product-level costs to produce 4,000 cases of lime vinaigrette.
$Answer AnswerOver-predictionUnder-prediction

Answer 1

Total Overhead = 600000 + 40000 + 84000 = 724000

Requirement a

If Machine hours : $724000 x 1000 hrs / 20000 hrs = $36200

Requirement b

If seperate

Rates : Unit level = $600000 x 1000 / 20000 = $30000 per Mh ; Batch = $40000 x 60 orders / 400 orders = $6000 per order ; Product = $84000 x 1/15 = $5600 per product

Total $41600

Requirement c

Multi cost driver - machine hours cost = $41600 - $36200 = $5400 = Under prediction

Requirement d

Batch Cost :

Seperate rates = ( 60/400 ) x 40000 = 6000 ; Machine hours only ( 1000 / 20000 ) x 40000 = 2000

Underprediction = 6000 - 2000 = 4000

Requirement e

Product cost :

Seperate rate = (1 product / 15 product ) x 84000 = 5600

Machine hours only ( 1000 / 20000 ) x 84000 = 4200

Under prediction = 5600 - 4200 = 1400