[redox1100]

The New Wave Co. is considering a new method for allocating overhead to its two products, regular and

premium coffee beans. Currently New Wave is using the traditional method to allocate overhead, in

which the cost driver is direct labor costs. However, it is interested in using two different drivers: machine

hours (MH) for separating and roasting beans, and pounds of coffee for packing and shipping. Machine

hours for the current month are 700 hours, direct labor cost per pound of coffee is $1.25, and direct

materials cost per pound of coffee is $1.50. There are 1,000 pounds of coffee packed and shipped for

the current month. The following data are also available:

Regular Premium

Overhead for the current month $5,000.00

Cost pool for separating and roasting beans 3,500.00, reg: 150 MH, prem: 550 MH

Cost pool for packing and shipping 1,500.00, reg: 500 pounds, prem: 500 pounds

What is the total cost per pound for the premium coffee using the new activity-based costing method?

a. $5.00

b. $5.75

c. $7.75

d. $9.75

It seems in this question they just give ACTUAL information. Don’t they need to give BUDGETED information to find overhead applied?

Thanks in advance

If the question isn’t formatted well, please visit to see the question https://www.becker.com/accounting/cpaexamreview/students/2011%20AICPA%20Business%20Questions.pdf

[mmp3]

redox1100: the question is asking you to find applied overhead using ABC costing, not traditional costing and this is only used for internal reporting. In this example there are two cost pools that make up the $5,000 overhead (separating beans and roasting). You will need to find the ratio for each to allocate overhead to the premium coffee:

(550/700)*3,500 = 2,750

(500/100)*1,500 = 750

Total overhead applied using ABC costing is 3,500

Overhead applied per pound 3,500/500 = $7

DM + DL per pound = 2.25

So the correct answer is 9.75

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[redox1100]

mmp3:

thank you for the quick response.

[Author]

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