The California Cooking Oil Company (CCO) has been using machine-hours as the bas
ID: 2581862 • 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 use signifacntly different factory supporting resources. As a start, the team suggests the following overheadcost pools,cost drivers, and estimated cost driver levels for manufacturing overheads:
CCO has recently completed production of 500 barrels each of P5 and G23. P5 is a cornbased oil distributed primarily through supermarkets . G23 is made from olive oil, flaxseed oil, and other exotic ingredients and sold up to scale restaurants as a gourment food. the production require the following operations:
Required:
1. 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 driversystem suggested by the ABC project team.
3. Critically discuss if the choice of costing system can be important competetive factor of CCO. How can the costing system help firm become more profitable and competitive?
Overhead cost pool Cost Driver Estimated cost driver level Budgeted overhead Machine setup Number of setups 100 R 100 000 Materials Handling Number of barrels 800 R 80 000 Quality Control Number of inspections 1000 R 200 000 Other Overhead Cost machine-Hours 10 000 R100 000
Explanation / Answer
1. Single cost driver system;
2.
3. The objective of costing is to match costs to the product with greatest accuracy possible. When allocating overhead using single recovery rate may not match the costs to the product with accuracy. In this backdrop ABC costing helps allocate overheads with the accuracy possible. Since costs are allocated
With out ascertaining costs it is difficult to set selling prices competitively, and selling prices determines competitiveness of the product in the market.
The problem with not ascertaining costs accurately results in the following problems:
1. If overhead is less allocated, the burden of recovering the balance overhead will pass to other products which makes them costlier and less attractive to customers
2. If overhead is over allocated, becomes costlier and less competitive.
Overhead recovery rate= Estimated total overhead cost Estimated cost driver level Estimated total overhead cost: Machine setup 100000 Materials Handling 80000 Quality Control 200000 Other Overhead Cost 100000 Estimated total overhead cost= 480000 Estimated cost driver level= 10000 Machine hours Overhead recovery rate= 480000 10000 Overhead recovery rate= 48 Per machine hour