Question

Idaho Potatoes (IP) grows and processes potatoes in its one plant.  It sells potatoes to two markets – retail and institutional.  The following information is available after a recent year-end:

	Retail	Institutional	Total
Pounds of Potatoes	900,000	100,000	1,000,000
Direct Material Cost	$135,000	$15,000	$150,000
Production Support			$983,000

IP currently allocates production support on the basis of pounds of potatoes.  

IP recently made a bid to supply 25,000 pounds of potatoes to a college.  It wants to add a profit of 20% of the cost in determining the selling price.

Part 2 After learning that their bid was rejected for being too high, IP decided to use ABC costing to calculate their unit cost and then submit a new bid. They were able to break out their production support costs as follows: To Retail 190 To Total Institutional Usage | 10 200 Total Allocation Costs Basis Packaging $188,000 # Materials Deliveries Cleaning $120,000 Pounds Cutting $231,000 hours 100,000 250 hours 1,000,000 3,850 900,000 3600 hours 36,000 hours Packaging $444,000 hours 1,000 hours 37,000 Total $983,000 Required • Using Excel, create a schedule showing the direct materials, packaging materials, cleaning, cutting and packaging costs for each product and the total cost. Calculate the unit cost for each product. • Calculate the new bid on the 25,000 pounds of potatoes to the institutional client. • Using Word, write an executive summary explaining your results. Step by Step Instructions 1. Calculate the overhead rate for all four overhead cost pools 2. Allocate all four overhead costs to the two products 3. Calculate the total cost for each product 4. Calculate the cost per pound for each product 5. Calculate the cost of the order of 25,000 pounds (institutional customer 6. Add the profit to the order of 25,000 pounds 7. Calculate the total price of 25,000 pounds to the institutional customer

Answer 1

Computation of cost Driver rates Overhead related to packeging material Cost Driver - Deliveries $188,000/200 940 per delivery Overhead related to Cleaning Cost Driver Pounds $120,000/1,000,000 12 per pound Overhead related to Cutting Cost Driver No of hours $231,000/3850 60 per hour Overhead related to packeging Cost Driver No of hours $444,000/37,000 12 per hour 9400 Allocation of overhead To Retail 940 190 178600 . 12900,000 108000 60*3600 216000 12*35,000 432000 Packeging material Cleaning Cutting Packeging To Institutional 940*10 12"100,000 60*250 121,000 12000 15000 12000 Calculation of Total Cost Particulars Retall Institutional Quantity (in pounds) 900,000 100,000 Direct material 135,000 15,000 Overhead Packeging material 178600 9400 Cleaning 108000 12000 Cutting 216000 15000 Packeging 432000 12000 Total Cost 1069600 63400 Calculation of cost per unit Retall 1,069,600/900.000 1.19 Institutional 63,400/100,000 0.63 Calculation of new bid for 25,000 pounds of patatoes (Institutional Client) 0.63 15,750 Cost per unit Cost for 25,000 pounds Profit @20% Price of bid 3150 18,900

Summary for explaining the result

Idaho potatoes (IP) sells potatoes to two market retail and institutional.IP quote a bid to supply 25,000 pounds of potatoes to college. Initially it used traditional method of allocating overhead on the basis of quantity but it's bid was rejected. Therfore IP decided to use ABC Costing for allocation of overhead earlier overhead was allocated in the ratio of 9:1 but after adoption of ABC Costing better allocation was made on the basis of different cost driver.Earlier $98,300 was allocated but now $63,400 is allocated for Institutional buyer which results in per unit cost of $0.63.