Cost Allocation Problem

	Bull	Dogs	Total
Number of woodcuts produced	500	1,500	2,000
Direct materials costs	$2,500	$3,300	$5,800
Direct labor costs	$1,400	$1,600	$3,000
Number of batches	10	30	40
Total overhead costs			$42,000
Batch setup costs (included in total overhead)			$12,000
Allocated Overhead in total	$10,500	$31,500	42,000
Total Product Cost Direct and Overheads	$14,400	$36,400	$50,800
Total Cost per unit produced	$28.80	$24.27

Millwood Mills makes decorative woodcuts and has two designs: Bull and Matador, and Dogs Playing Poker. The simplistic costing system used by Millwood Mills allocates all overhead based on number of units produced. This method allocates overhead of $21 ($42,000 2,000 units) to each Bull and Matador woodcut and to each Dogs Playing Poker woodcut. Production is done in batches and each time a batch is run it incurs batch set up costs. Batch setup costs total $12,000 and get allocated as part of total overhead based upon units produced.

The manager of the Bull and Matador line doubles batch size on her line w/o incurring any incremental costs. She thinks this will cut her batch set-up costs in half, since the cost driver for batch setup costs is the number of batches.

Batch setup cost is $300/batch (12,000/40 batches)

In the month following this change, total overhead drops by $1500 ($300x5 batches eliminated).

1. Allocate the new lower overhead costs to each line using the same method employed by Millwood Mills. What cost savings would the Manager of Bull and Matador lines see in her total product cost under the overhead cost allocation method used at Millwood? Is this appropriate?
2. Would you recommend a different method of costing? If so, what would be the cost pool(s) and allocation base(s) that you would use and how would the costs be allocated to each line change?