Question: Multiple Cost Drivers
Lettuce Serve manufactures a variety of specialty salad dressings. Production runs are both high-volume and low-volume activities, depending on customer orders. Presented is Lettuce Serve's 2017 general manufacturing costs (manufacturing overhead) and each cost's related activity cost driver.
Level......................Total Cost...................Units of Cost Driver
Unit.........................$500,000.................. 10,000 machine hours
Batch...................... 50,000...................... 500 customer orders
Product................... 100,000.................... 25 products
Their cranberry vinaigrette dressing required 3,000 machine hours to fill 10 customer orders for a total of 8,000 units.
Required
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 cranberry vinaigrette.
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 cranberry vinaigrette.
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 cranberry vinaigrette.
d. Determine the error in the prediction of cranberry vinaigrette 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 cranberry vinaigrette.
e. Determine the error in prediction of cranberry vinaigrette 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 cranberry vinaigrette.