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# Determing cost driver, computing cost

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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?

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#### 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

## Hypothesis Testing

1. Callaway Golf Company's new forged titanium ERC driver has been described as "illegal" because it promises driving distances that exceed the USGA's standard. Golf Digest compared actual driving distances with the ERC driver and a USGA approved driver with a population mean driving distance of 280 yards. Based on nine test drives, the mean driving distance by the ERC driver was 286.9 yards (Golf Digest, May 12, 2000). Answer the following questions assuming a sample standard deviation driving distance of 10 yards.

a. Formulate the null and alternate hypotheses that can be used to determine whether the new ERC driver has a population mean driving distance greater than 280 yards.
b. On average, how many yards farther did the golf ball travel with the ERC driver?
c. At &#945; = 0.05, what is your conclusion?

2. Microsoft Outlook is the most widely used e-mail manager. A Microsoft executive claims that Microsoft Outlook is used by at least 75% of the Internet users. A sample of Internet users will be used to test this claim.

a. Formulate the hypotheses that can be used to test the claim.
b. A Merrill Lynch study reported that Microsoft Outlook is used by 72% of Internet users (CNBC, June 2000). Assume that the report was based on a sample size of 300 Internet users. What is the p-value?
c. At &#945; = 0.05, should the executive's claim of at least 75% be rejected?

3. An extensive study of the cost of health care in the United States presented data showing that the mean spending per Medicare enrollee was \$6883. To investigate differences across the country, a researcher took a sample of 40 Medicare enrollees in Indianapolis. For the Indianapolis sample, the mean 2003 Medicare spending was \$5980 and the standard deviation was \$2518.

a. State the hypothesis for deter ming whether the mean annual Medicare spending in Indianapolis is lower than the national mean.
b. Use the preceding sample results to compute the test statistic and the p value.
c. Use a=.05(level of significance). What is your conclusion?
d. Repeat the hypothesis test using the critical value approach.

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