Reference no: EM13492164

Allocating overhead to products using activity-based costing (CMA adapted) (LO 2, 5) Nancy's Nut House is a processor and distributor of a variety of different nuts. The company buys nuts from around the world and roasts, seasons, and packages them for resale. Nancy's Nut House currently offers 15 different types of nuts in one-pound bags through catalogs and gourmet shops. The company's major cost is that of the raw nuts; however, the predominantly automated roasting and packing processes consume a substantial amount of manufacturing overhead cost. The company uses relatively little direct labor.

Some of Nancy's nuts are very popular and sell in large volumes, but a few of the newer types sell in very low sales volumes. Nancy's prices its nuts at cost (including overhead) plus a markup of 40%. If the resulting prices of certain nuts are significantly higher than the market price, adjustments are made. Although the company competes primarily on the quality of its products, customers are price conscious.

Data for the 2012 budget include manufacturing overhead of $6,000,000, allocated on the basis of each product's direct labor cost. The budgeted direct labor cost for 2012 totals $1,200,000. Based on the sales budget and raw materials standards, purchases and use of raw materials are expected to total $9,000,000 for the year.

The unit costs of a one-pound bag of two of the company's products follows.

	Cashews	Chestnuts
Raw materials	$4.20	$3.20
Direct labor	0.30	0.30

Nancy's controller believes that the traditional costing system may be providing misleading cost information, so she has developed the following analysis of the 2012 budgeted manufacturing costs.

Activity Cost Driver Budgeted Activity Budgeted Cost Purchasing Purchase orders 1,146 $1,146,000 Material handling Number of setups 1,800 1,440,000 Quality control Number of batches 600 300,000 Roasting Roasting hours 96,100 1,922,000 Seasoning Seasoning hours 33,600 672,000 Packaging Packaging hours 26,000 520,000 Total manufacturing overhead cost $6,000,000

Data regarding the 2012 production of cashews and chestnuts follow. There will be no Raw Materials Inventory for either type of nuts at the beginning of the year.

	Cashews	Chestnuts
Expected sales	100,000 lbs.	2,000 lbs.
Batch size	10,000 lbs.	500 lbs.
Setups	3 per batch	3 per batch
Purchase order size	25,000 lbs.	500 lbs.
Roasting time	1 hour/100 lbs.	1 hour/100 lbs.
Seasoning time	0.5 hour/100 lbs.	0.5 hour/100 lbs.
Packaging time	0.1 hour/100 lbs.	0.1 hour/100 lbs.

a. Using the current costing system, calculate the cost and selling price of one pound of cashews and one pound of chestnuts.

b. Using an activity-based costing approach and the information provided, calculate the cost and selling price of one pound of cashews and one pound of chestnuts.

c. Given the activity-based costing information you have just calculated, what action do you suggest Nancy's Nut House should take regarding cashews and chestnuts?