Wallace Printing prints weekly advertisements for 15 custome

Wallace Printing prints weekly advertisements for 15 customers. For 2016, Wallace budgeted $1,000,000 of manufacturing overhead cost and 20 million pages printed.

For 2016 Wallace Printing decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers. The following information was gathered during the analysis:

Cost pool Manufacturing overhead costs Activity level

Design changes $360,000 300 design changes

Setups 600,000 4,000 setups

Inspections 40,000 1,000 inspections

Total overhead costs $1,000,000

During 2016, two of Wallace’s customers, Wealth Managers and Health Systems, used the following printing services:

Activity Wealth Managers Health Systems

Pages 100,000 125,000

Design changes 1 25

Setups 25 30

Inspections 4 15

Wallace Printing charges its customers $0.10 per page printed and uses normal costing. Total direct costs are $0.04 per page printed.

a. Suppose Wallace considers manufacturing overhead costs as one cost pool and allocates overhead based on the number of pages printed. What is the overhead allocation rate?

b. Using the allocation rate determined in the previous question, what is the manufacturing overhead cost allocated to Health Systems for 2016?

c. If Wallace considers manufacturing overhead costs as one cost pool and allocates overhead based on the number of pages printed, what profit (loss) does Wallace earn from Health Systems for 2016?

d. Now suppose Wallace uses activity cost pools. What is the allocation (activity) rate for the inspections cost pool?

e. If Wallace allocates manufacturing overhead costs using activity cost pools, what is the manufacturing overhead allocation for Wealth Managers during 2016?

f. If manufacturing overhead costs are allocated using activity cost pools, what profit (loss) does Wallace Printing earn from Wealth Managers during 2016?

Solution

a) Overhead allocation rate basis number of pages printed = total manufacturing overhead / number of pages printed

= 10,00,000/ 2,00,00,000

= $0.05

b) Manufacturing cost allocated to Health Systems in 2016 = allocation rate * number of pages printed

= 0.05*125000

= $6,250

c) The profit / loss of Health Systems using pages printed as the overhead allocation rate

d) Allocation rate for inspection cost pool = inspection costs / number of inspections

= 40000 / 1000

= $40

e) Manufacturing overhead allocation for Wealth Managers using activity cost pools

Allocation rates have been calcuated as follows:

f) Profit/loss from Wealth Managers using activity costing