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
The correct answer is D.
(550/700)*3,500 = 2,750
(500/100)*1,500 = 750
Then you divide 3500/500=7 then add DL and DM.
My only question is how are we supposed to divide 3500 by 500? Where is this 500 coming from.
.