Company Disney manufactures a variety of high-volume and low-volume products to
ID: 2426683 • Letter: C
Question
Company Disney manufactures a variety of high-volume and low-volume products to customer demand. Presented is information on 2015 manufacturing overhead and activity cost drivers.
Level Total Cost Units of Cost Driver
Unit $600,000 20,000 machine hours
Batch 200,000 1,000 customer orders
Product 400,000 50 products
Product X1 required 3,000 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.
B. Assuming manufacturing overhead is estimated and predicted using separate rates for machine hours, customer orders, and products (a multiple-level cost hierarchy), determine the predicted total overhead costs to produce the 8,000 units of product X1.
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 X1.
D. Determine the error in the prediction of X1 batch-level costs resulting from the use of only machine hours. Indicate whether the use of only machine hours results in overpredicting or underpredicting the batch-level costs of product X1
E. Determine the error in the prediction of X1 product-level costs resulting from the use of only machine hours. Indicate whether the use of only machine hours results in overpredicting or underpredicting the product-level costs of product X1.
Explanation / Answer
A. Manufacturing overhead rate = (600000 + 200000 + 400000)/20000
= 60 per hour
Total cost of Product X1 = 3000 x 60 = 180000
B. Total cost of product X1 = 600000/20000 x 30000 + 200000/1000 x 10 + 400000/50
= 100000
C. Use of only machine hour results in overpredicting the cost to produce 8000 units of X1.
D. Difference between overhead = 180000 - 100000
= 80000
Use of only machine hour results in overpredicting the cost to produce 8000 units of X1
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