INDIANA CORPORATION …… is a bakery that is known for its strawberry cheesecake. It also makes 12 different kinds of cheesecake as well as many other types of bakery items. The company uses normal costing with direct-labor dollars as their base for allocating overhead to its various bakery products. The company estimates overhead for the upcoming year of $421,000 and estimates direct labor of $2,000,000. The following estimated information is available for their Strawberry Cheesecake product: Annual production 17,500 units Direct materials per unit $6 Direct labor per unit $2 Required: Compute the predetermined rate (overhead per dollar of labor) – Round this to TWO decimal places. Determine the amount of estimated overhead applied to one unit of strawberry cheesecake (one cake) AND the estimated amount of overhead to be applied to that product line for the year. What is the total estimated unit cost of the strawberry cheesecake? NOW consider the following additional information about

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INDIANA CORPORATION …… is a bakery that is known for its strawberry cheesecake

Economics Jan 09, 2021

INDIANA CORPORATION

…… is a bakery that is known for its strawberry cheesecake. It also makes 12 different kinds of cheesecake as well as many other types of bakery items. The company uses normal costing with direct-labor dollars as their base for allocating overhead to its various bakery products.

The company estimates overhead for the upcoming year of $421,000 and estimates direct labor of $2,000,000.

The following estimated information is available for their Strawberry Cheesecake product:

Annual production	17,500 units
Direct materials per unit	$6
Direct labor per unit	$2

Required:

Compute the predetermined rate (overhead per dollar of labor) – Round this to TWO decimal places.

Determine the amount of estimated overhead applied to one unit of strawberry cheesecake (one cake) AND the estimated amount of overhead to be applied to that product line for the year.

What is the total estimated unit cost of the strawberry cheesecake?

NOW consider the following additional information about the estimated overhead of $421,000. You have analyzed this amount, and determined that the following breakdown and have identified appropriate activities that appear to cause, or drive these costs, as follows:

Overhead	Cost	Proposed Driver
Materials ordering	$ 72,000	Number of purchase orders
Materials inspection	75,000	Number of receiving reports
Equipment setup	105,000	Number of setups
Quality control	69,000	Number of inspections
Other	100,000	Direct labor cost
Total manufacturing overhead	$421,000	(estimated)

ASSUME that the following amounts of various cost drivers will be used for all products and for the Strawberry Cheesecake product:

Activity	All Products	Strawberry Cheesecake
Materials ordering	8,000 orders	100
Materials inspection	375 receiving reports	60
Equipment setup	3,000 setups	30
Quality control	3,000 inspections	150
Other	$2,000,000 direct labor	$35,000




	Briefly explain the process which the company went through in order to arrive at the overhead information AND activity/driver information provided immediately above. Given this additional information, do you still like the unit costs and estimated product costs for the year that you computed in #2 and #3 above? If not, explain WHY. Does the cost assignment above reflect the actual consumption of resources by the Strawberry Cheesecake product? Using ACTIVITY BASED COSTING and the information above. What new unit cost and estimated product cost would you propose management use? WHY is this preferable? Was the Strawberry Cheesecake miscosted by using the “peanut butter costing” approach? If so, was it under- or over-costed AND by how much per unit? Using the original allocation base of direct labor hours, what percentage of the overhead costs were being assigned to the Strawberry Cheesecake? Compute the consumption rates of Strawberry Cheesecake for the activities indicated. What area or areas appear to be the “problem areas” in terms of product costing? Explain WHY, in plain English, your answer came out the way it did. WHY did ABC provide a better allocation in this case?

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