Appropriate cost driver for allocating overhead to pizzas

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Reference no: EM131214352

Big Al’s Pizza, Inc., a new subsidiary of Big Al’s Pizza Emporium, has been established to produce partially baked, flash-frozen, 16-inch meat pizzas to be sold wholesale to grocery and convenience stores and school cafeterias. As a new entrant to the market, the company’s goal is to produce and sell 319,500 pizzas in the first year. Big Al’s plans to keep approximately a one-month supply of frozen pizzas in finished goods inventory. Big Al’s Pizza will have 10 production lines. Each of the five workers on each line will be responsible for one of the five stages of production: dough, sauce, cheese, toppings, and packaging. Each of the 10 production lines can produce 20 meat pizzas per hour. Big Al’s deals exclusively with Pizza Products, Inc. to purchase raw materials and equipment. All ingredients (dough, sauce, cheese, meat, etc.) are fresh, and Big Al’s generally holds a two-or three-day supply in raw materials inventory.

The projected material costs are as follows:

Material Costs (per pizza)

Complete dough shells $.12

Complete sauce package .20

Complete cheese package .08

Complete meat package .30

Complete assembly package .04

Direct labor employees are paid on an hourly basis according to hours worked. Once production-line workers finish a day’s scheduled production, they are sent home. They can work a maximum of 8 hours each day without earning overtime. The overtime premium is an additional 50 percent of the basic hourly rate of $7.50 per hour. Supervisors and other indirect labor employees are salaried.

Labor Costs (estimated)

Rate for direct labor $7.50 per hour (plus $2.50 per hour in fringe benefits) Indirect labor (per month):

Supervisor (including fringe benefits) $3,000

Other indirect labor (including fringe benefits) $2,000

Overhead Costs (estimated, per month)

Rent on production facility $1,000

Utilities $1,475

Other overhead:

Indirect material $2,500

Maintenance costs $1,500

Quality inspection costs $2,000

Equipment (lease costs) $2,500

Selling and Administrative Costs (estimated, per month)

Administrative salaries $4,000

Salaries of sales staff $5,000

Product promotion and advertising $2,000

Rent on office space for staff $2,000

Utilities and insurance $ 500

Lease of office furniture and equipment $ 800

During the first year of operation, Big Al’s estimated that they would produce 346,125 pizzas but actually produced 336,033 pizzas. Direct material costs were $248,664 and direct labor costs were $840,082 for 84,008 hours worked. Estimated overhead costs for the year were $191,700 while actual overhead was $193,000.

Required:

A. What is an appropriate cost driver for allocating overhead to pizzas in year 1?

B. Using normal costing, compute the cost of each of the 336,033 meat pizzas produced in year 1. (Round down to nearest dollar.)

C. Was overhead over- or under applied during the year? By how much? Why do you think overhead was over- or under applied during the year?

Reference no: EM131214352

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