The California Cooking Oil Company (CCO) has been using machine-hours as the bas
ID: 2451488 • Letter: T
Question
The California Cooking Oil Company (CCO) has been using machine-hours as the basis to determine overhead costs for all products. An ABC project team points out that the firm manufactures several products, each of which uses significantly different factory supporting resources. As a start, the team suggests the following overhead cost pools, cost drivers, and estimated cost driver levels for manufacturing overheads: CCO has recently completed production of 600 barrels each of P5 and G23. P5 is a corn- based oil distributed primarily through supermarkets. G23 is made from olive oil, flaxseed oil, and other exotic ingredients and sold to up-scale restaurants as a gourmet food. The productions require the following operations: Determine the overhead costs per barrel of P5 and G23 using the current single cost driver system based on machine-hours. 2. Determine the overhead costs per barrel of P5 and G23 using the multiple cost driver system suggested by the ABC project team. 3. Explain how the choice of costing system can be an important competitive factor for CCO. How can the costing system help the firm become more profitable and competitive?Explanation / Answer
Other OH costs
Other OH costs
Other OH costs
No of Cost drivers for 600 barrels OH Cost Pool Cost Driver Estimated cost driver level Budgeted Overhead OH cost /cost driver level P5 G23 Machine set ups No of set ups 120 80,000 667 3 45 Materials handling No Of Barrels 12,000 120,000 10 600 600 Quality control No Of inspections 1,300 240,000 185 4 16Other OH costs
Machine hours 8,500 100,000 12 1,250 1,250 Total 540,000 Single cost driver system Total Machine hrs 8,500 Total Overheads 540,000 Overheads/Machine Hour 63.53 1 P5 G23 Machine hrs for 600 barrels 1250 1,250 Overheads for 600 Barrels 79,411.76 79,411.76 Overheads per barrel 132.35 132.35 No of Cost drivers for 600 barrels Overheads for 600 barrels Overheads cost per barrel OH Cost Pool Cost Driver OH cost /cost driver level P5 G23 P5 G23 P5 G23 Machine set ups No of set ups 667 3 45 2,000 30,000 3.33 50.00 Materials handling No Of Barrels 10 600 600 6,000 6,000 10.00 10.00 Quality control No Of inspections 185 4 16 738 2,954 1.23 4.92Other OH costs
Machine hours 12 1,250 1,250 14,706 14,706 24.51 24.51 Total 23,444 53,660 39.07 89.43 Overheads cost per barrel OH Cost Pool P5 G23 Machine set ups 3.33 50.00 Materials handling 10.00 10.00 Quality control 1.23 4.92Other OH costs
24.51 24.51 Total 39.07 89.43 3 It is clear from the example that the old system of OH allocation is not very accurate as it distributes OH on a single bais. ABC system on the other hand shows more accuracy in OH cost distribution as it follows the actual consumption of resources and shows a better estimate of productwise profitability. CCO can greatly improve it competitiveness as it can prceisely find productwise costs and accordingly make a better pricing decision for each product. Also CCO can make precise efforts in improving the profitability by attacking the areas where more resource is getting consumed