Case 2

Clean Paint Pty Ltd manufactures two high-quality base paints: an oil-based paint and a latex paint. Both are housepaint and are manufactured in neutral white colour only. Clean Paint Pty Ltd sells the base white paints to franchised retail paint and decorating stores where pigments are added to tint (colour) the paint as the customer desires. The oil-bases paint is made with organic solvents (petroleum products) such as mineral spirits or turpentine. The latex paint is made with water; synthetic resin particles are suspended in the water; and dry and harden when exposed to the air.

Clean Paint Pty Ltd uses the same processing equipment to produce both paints in different production runs. Between batches, the vats and other processing equipment must be washed and cleaned.

After analysing the company's entire operations, Clean Paint Pty Ltd accountants and production have identified activity cost pools and accumulated annual budgeted overhead costs by pool as follows.

Activity Cost Pools Estimated Overhead

Purchasing $240,000

Processing (weighing and mixing, grinding, thinning and drying, straining) $1,400,000

Packaging (quarts, gallons and 5-gallons) $580,000

Testing $240,000

Storage and inventory control $180,000

Washing and cleaning equipment $560,000

Total annual budgeted overhead $3,200,000

Following further analysis, activity cost drivers were identified and their expected use by product and activity were scheduled as follows.

Expected Use of Drivers per Product

Activity Cost Pools Cost Drivers Expected Cost Drivers per Activity Oil-based Latex

Purchasing Purchase orders 1,500 orders 800 700

Processing Gallons processed 1,000,000 gallons 400,000 600,000

Packaging Containers filled 400,000 containers 180,000 220,000

Testing Numbers of Tests 4,000 tests 2,100 1,900

Storing Avg. gals. On hand 18,000 gallons 10,400 7,600

Washing Number of batches 800 batches 350 450

Clean Paint Pty Ltd has budgeted 400,000 gallons of oil-based paint and 600,000 gallons of latex paint for processing during this year.

Instructions

a. Prepare a schedule showing the computations of the activity-based overhead rates and a schedule assigning each activity's overhead cost pool to each product (5 Marks).

b. Explain the four benefits of ABC compare to traditional costing system (5 Marks).

c. Compute the overhead cost per unit for each product (5 Marks).