Question

Main Street Ice Cream Company uses a plantwide allocation method to allocate overhead based on direct labor-hours at a rate of $2 per labor-hour. Strawberry and vanilla flavors are produced in Department SV. Chocolate is produced in Department C. Sven manages Department SV and Charlene manages Department C. The product costs (per thousand gallons) follow:
Strawberry Vanilla Chocolate
Direct labor (per 1,000 gallons) $766 $841 $1,141
Raw materials (per 1,000 gallons) 816 516 616
Requirement 1:
If the number of hours of labor per 1,000 gallons is 60 for strawberry, 70 for vanilla, and 100 for chocolate, compute the total cost of 1,000 gallons of each flavor using plantwide allocation.
Total cost
Strawberry $1,702
Vanilla $1,497
Chocolate $1,957
Requirement 2:
Charlene's department uses older, outdated machines. She believes that her department is being allocated some of the overhead of Department SV, which recently bought state-of-the-art machines. After she requested that overhead costs be broken down by department, the following information was discovered:
Department SV Department C
Overhead $88,760 $915
Machine-hours 25,360 37,600
Labor-hours 25,360 18,300
Using machine-hours as the department allocation base for Department SV and labor-hours as the department allocation base for Department C, compute the allocation rate for each.
Allocation rate
Department SV $3.50
Department C $0.05
Requirement 3:
Compute the cost of 1,000 gallons of each flavor of ice cream using the department allocation rates computed in requirement 2 if the number of machine-hours for 1,000 gallons of each of the three flavors of ice cream are as follows: strawberry, 60; vanilla, 70; and chocolate, 166. Direct labor hours by product remain the same as in requirement 1.
Requirement 4:
A) Was Charlene correct in her belief?
B) Department allocation generally yields more accurate product cost information.
1) True
2) False

Answer 1

Answer:

See below

Explanation:

a. Compute the total cost per 1,000 gallons

Strawberry Vanilla Chocolate

Direct labor $766 $841 $1,141

Raw materials $816 $516 $616

Overhead (60×$2)$120 ($70×2)$140 (100×$2) $200

Total cost $1,702 $1,497 $1,957

Therefore,

Total cost = $1,702 + $1,497 + $1,957 = $5,156

b. Compute the allocation rate for each department

Allocation base

Allocation rate

Department SV Per machine hour $88,760/25,360 $3.5

Department C Per labor hour

$915/18,300 $0.05

c. Compute the total cost

Strawberry Vanilla Chocolate

Direct labor $766 $841 $1,141

Raw materials $816 $516 $616

Overhead (60×$3.5)$210 (70×$3.5)$245 (100×$3.5)$350

Total cost $1,792 $1,707 $2,107

Therefore,

Total cost = $1,792 + $1,707 + $2,107 = $5,606