Question

Multiple Cost Drivers Scottsdale Ltd. manufactures a variety of high-volume and low volume products to customer demand. Presented is information on 2013 manufacturing overhead and activity cost drivers Level Total Cost Units of Cost Driver $ 500.000 10.000 machine hours 100.000 500 customer orders Product 200.000 25 products Product X1 required 2,000 machine hours to fill 10 customer orders for a total of 8,000 units. (a) Assuming all manufacturing overhead is estimated and predicted on the basis of machine hours, determine the predicted total overhead costs to produce the 8.000 units of product X1 $ 160,000 (b) Assuming manufacturing overhead is estimated and predicted using separate rates for machine hours, customer orders, and products (analtiple-level cost hierarchyl, determine the predicted total overhead costs to produce the 8.000 units of product X1 $ 110,000 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 8,000 units of product X 550.000 Over prediction SD PM

Answer 1

Answer:

a)

Overhead rate based on machine hours	800,000 / 10,000 = 80
Cost for 8000 units 2000* 80	160,000

b)

	Cost	Cost Driver	Activity Rate	Product X
Unit	500,000	10,000	50	2,000	100,000
Batch	100,000	500	200	10	2,000
Product	200,000	25	8,000	1	8,000
Total Cost					110,000

c)	Predicted X1 manufacturing overhead based on machine hours	160,000
	Predicted X1 manufacturing overhead using cost hierarchy	110,000
	Over prediction of X1 manufacturing overhead costs with use of machine hours	50,000

d)	Batch - level rate per machine hour (100,000 / 10,000) = 10 Therfore 10 * 2,000	20,000
	Activity rate using batch level 200 * 10 batch	2,000
	Over - prediction of X1 batch - level costs with use of machine hours	18,000

e)	Product - level rate per machine hour (200,000 / 10,000) = 20	40,000
	Activity rate using batch level 8000 * 1 product	8,000
	Over - prediction of X1 batch - level costs with use of machine hours	32,000