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Determing cost driver, computing cost

Big Al 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 its first year. Big Al's plans to keep approximately 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 material inventory.

During the first year of operation, Big Al's estimated the they would produce 346,125 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.

A. What is the 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.
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?

Solution Preview

A. What is the appropriate cost driver for allocating overhead to pizzas in Year 1?

Cost drivers are activities that cause overhead costs to be incurred. The appropriate cost driver for allocating overhead to pizzas will be labor ...

$2.19