Best Brew Corporation manufactures two variants of coffee: Regular and Extra Rich

Regular Extra Rich Total

Direct materials in pounds 225,000 110,000 335,000
Direct labor hours 45,000 65,000 110,000
Machine hours 36,000 24,000 60,000
Number of setups 1,450 2,375 3,825
Number of gallons produced 450,000 90,000 540,000

The 335,000 pounds of material had a total cost of 753,750 Direct labor is

a) If Best Brew Corporation applies factory overhead using direct labor hours, compute the total production
Regular Extra Rich
Direct materials 506,250 247,500
Direct labor 945,000 1,365,000
Overhead 904,960.23 1,307,164.77
Total production costs 2,356,210.23 2,919,664.77
Gallons produced 450,000 90,000
Unit cost 5.24 32.44

b) If Best Brew Corporation applies factory overhead using machine hours, compute the total production co
Regular Extra Rich
Direct materials 506,250 247,500
Direct labor 945,000 1,365,000
Overhead 1,327,275 884,850
Total production costs 2,778,525 2,497,350
Gallons produced 450,000 90,000
Unit cost 6.17 27.75

c) Assume that Best Brew Corporation has established the following activity centers, cost drivers, and cost

Cost Pool Cost Driver Cost Volume

Equipment Maintenance # of machine hours 450,000 60,000.00
Production Setup # of setups 248,625 3,825.00
Material Handling Pounds of Materials 703,500 335,000.00
Storage Costs # of gallons produced 810,000 540,000.00

Compute the total cost and unit cost for each brand.

Regular Extra Rich Overhead is computed as follows:

Direct materials 506,250 247,500 Cost Pool
Direct labor 945,000 1,365,000 Equipment Maintenance
Overhead 1,511,750 700,375 Production Setup
Total production costs 2,963,000 2,312,875 Material Handling
Gallons produced 450,000 90,000 Storage Costs
Unit cost 6.58 25.70 Total
Gallons produced
 Overhead per Unit

d) Explain why the unit cost for each model is different across the three methods of overhead application. H
The unit cost for each model is different because they assign overheads differently. In the first method, overhead is
also simply allocated based on machine hours. In the third method, overhead is allocated based on its correspondi
individual differences that occur in the production and instead, assigns mor

In the first method, the Extra Rich brand was assigned more overhead because the basis was on direct labor ho
company focusing more on the Regular brand because of its lower cost. In the second method, with the basis of
Extra Rich decreasing from 32.44 to 27.75. In the third method, the overhead was broken down individually in a m
Having a more accurate analysis enables the company to accurately price its products
 Below is the current year production date for the company:

ect labor is 21 per hour. The company has total overhead production costs of 2,212,125

, compute the total production cost and the unit cost for each brand.
Total Cost of Materials 753,750.00
Total materials in pounds 335,000.00
Cost of material per pound 2.25

Total Cost of Overhead 2,212,125

Total direct labor hours 110,000
Cost of overhead per hour 20.11

ompute the total production cost and the unit cost for each brand.
Total Cost of Materials 753,750.00
Total materials in pounds 335,000.00
Cost of material per pound 2.25

Total Cost of Overhead 2,212,125

Total machine hours 60,000
Cost of overhead per hour 36.87

centers, cost drivers, and costs to apply factory overhead.

erhead is computed as follows:

Cost Cost Driver per Unit Regular Extra Rich Total
uipment Maintenance 450,000 60,000 7.50 270,000 180,000 450,000
oduction Setup 248,625 3,825 65.00 94,250 154,375 248,625
aterial Handling 703,500 335,000 2.10 472,500 231,000 703,500
orage Costs 810,000 540,000 1.50 675,000 135,000 810,000
1,511,750 700,375 2,212,125
llons produced 450,000 90,000
erhead per Unit 3.36 7.78

ods of overhead application. How can this information benefit the organization?
In the first method, overhead is simply allocated based on direct labor hours. In the second method, overhead is
ocated based on its corresponding cost drivers. The allocation of overhead using cost drivers does not consider
duction and instead, assigns more overhead to higher volume products.

the basis was on direct labor hours. Because of this, the product could result to a higher sales price with the
econd method, with the basis of machine hours, the unit cost for Regular increased to 6.17 from 5.24, with the
s broken down individually in a more realistic approach which resulted to a more accurate overhead allocation.
y to accurately price its products along with planning and monitoring its product mix.
Video Corporation has two product lines: LCD televisions and projection televisions. The company has budgeted th

LCD TVs Projection TVs

Units Produced 1,500 2,250
Direct Labor Hours per Unit 20 30
Material Moves per Product 15 25
Budgeted Materials Handling Cost 75,000
Total Machine Hours 10,000 16,000
Machine Maintenance Costs 180,000

1. If the company uses total direct labor hours to allocate factory overhead, the materials handling cost allocated to
Budgeted Materials Handling Cost 75,000.00
LCD TVs 20 1,500 30,000.00 23,076.92
Projection TVs 30 2,250 67,500.00 51,923.08
97,500.00
2. If the company uses total direct labor hours to allocate factory overhead, the machine maintenance cost allocated
Machine Maintenance Costs 180,000
LCD TVs 20 1,500 30,000.00 55,384.62
Projection TVs 30 2,250 67,500.00 124,615.38
97,500.00

3. If the company uses total direct labor hours to allocate factory overhead, the materials handling cost allocated to
Budgeted Materials Handling Cost 75,000.00
LCD TVs 20 1,500 30,000.00 23,076.92
Projection TVs 30 2,250 67,500.00 51,923.08
97,500.00
4. If the company uses total direct labor hours to allocate factory overhead, the machine maintenance cost allocated
Machine Maintenance Costs 180,000
LCD TVs 20 1,500 30,000.00 55,384.62
Projection TVs 30 2,250 67,500.00 124,615.38
97,500.00

5. If the company uses a number of units produced to allocate factory overhead, the materials handling cost allocat
Budgeted Materials Handling Cost 75,000.00
LCD TVs 1,500 30,000.00
Projection TVs 2,250 45,000.00
3,750

6. If the company uses a number of units produced to allocate factory overhead, the machine maintenance cost allo
Machine Maintenance Costs 180,000
LCD TVs 1,500 72,000.00
Projection TVs 2,250 108,000.00
3,750
7. If the company uses a number of units produced to allocate factory overhead, the materials handling cost allocat
Budgeted Materials Handling Cost 75,000.00
LCD TVs 1,500 30,000.00
Projection TVs 2,250 45,000.00
3,750
8. If the company uses a number of units produced to allocate factory overhead, the machine maintenance cost allo
Machine Maintenance Costs 180,000
LCD TVs 1,500 72,000.00
Projection TVs 2,250 108,000.00
3,750

9. If the company uses an activity-based costing (ABC) system to allocate factory overhead, the materials handling
Budgeted Materials Handling Cost 75,000.00
LCD TVs 15 28,125.00
Projection TVs 25 46,875.00
40

10. If the company uses an activity-based costing (ABC) system to allocate factory overhead, the machine mainten
Machine Maintenance Costs 180,000
LCD TVs 10,000 69,230.77
Projection TVs 16,000 110,769.23
26,000
 ompany has budgeted the following production and overhead costs for the upcoming year:

handling cost allocated to LCD TVs would be

maintenance cost allocated to LCD TV's would be

handling cost allocated to projection TVs would be

maintenance cost allocated to projection TV's would be

rials handling cost allocated to LCD TVs would be

hine maintenance cost allocated to LCD TVs would be

rials handling cost allocated to projection TVs would be

hine maintenance cost allocated to projection TVs would be

ad, the materials handling cost allocated to LCD TVs would be

ead, the machine maintenance cost allocated to LCD TVs would be