Greenwood Inc. processes and distributes various types of soil. The production process include mixing, blending, and packaging the processed soil for resale. Greenwood offers a large variety of soil types that it sells in one-kilogram bags to local retailers for small do-it-yourself jobs. The major cost of the soil is raw materials, and the company uses relatively little direct labour. However, the company's predominantly automated mixing, blending, and packaging processes require a substantial amount of manufacturing overhead.

Some of Greenwood's product mixtures are very popular and sell in large volumes, while a few of the recently introduced soil mixtures sell in very low volumes. Greenwood prices its product at manufacturing cost plus a 25% markup, with some adjustments made to keep the company's prices competitive.

Greenwood's budget includes estimated manufacturing overhead cost of $4,400,000 for the coming year. Manufacturing overhead is assigned to products on the basis of direct labour-hours. The expected direct labour cost totals $1,200,000, which represents 100,000 hours of direct labour time. Based on the sales budget and expected raw materials costs, the company will purchase and use $10,000,000 of raw materials during the year.

The expected costs for direct materials and direct labour for one-kilogram bags of two of the company's products appear below:

Standard Premium Soil

Direct materials $9.00 $5.80

Direct labour (0.02 hours per bag) $0.24 $0.24

Greenwood's controller believes that the company's traditional costing system may be providing misleading cost information. To determine whether this is the case, the controller has preparedan analysis of the year's expected manufacturing overhead costs, as shown in the below table:

Expected Activity Expected Cost

Activity Cost Pool Activity Measure for the Year for the Year

Purchasing Purchase orders 4,000 $1,120,000

Materials handling Number of setups 2,000 386,000

Quality control Number of batches 1,000 180,000

Mixing Mixing-hours 190,000 2,090,000

Blending Blending-hours 64,000 384,000

Packaging Packaging-hours 48,000 240,000

Total manufacturing overhead cost $4,400,000

Data regarding the expected production of Standard and Premium Soil mixes are presented below:

Standard Premium

Expected sales 160,000 kilograms 8,000 kilograms

Batch size 10,000 kilograms 500 kilograms

Setups 4 per batch 4 per batch

Purchase order size 20,000 kilograms 500 kilograms

Mixing time per 100 kilograms 3 mixing-hours 3 mixing-hours

Blending time per 100 kilograms 1 blending-hour 1 blending-hour

Packaging time per 100 kilograms 0.6 packaging-hours 0.6 packaging-hours

Required:

1.Using direct labour-hours as the base for assigning manufacturing overhead cost to products, do the following:

a.Determine the predetermined overhead rate that will be used during the year.

b.Determine the unit product cost of one kilogram of the standard soil and one kilogram of the premium soil.

2.Using ABC as the basis for assigning manufacturing overhead cost to products, do the following:

a.Determine the total amount of manufacturing overhead cost assigned to the standard soil and to the premium soil for the year.

b.Using the data developed in 2(a) above, compute the amount of manufacturing overhead cost per kilogram of the standard soil and one kilogram of the premium soil. Round all computations to the nearest whole cent.

c.Determine the unit product cost of one kilogram of the standard soil and one kilogram of the premium soil.

3.Write a brief memo to the president of Greenwood explaining what you found in (1) and (2) above, and discuss the implications to the company of using direct labour as the base for assigning manufacturing overhead cost to products