Allocating overhead to products using activity-based costing (CMA adapted) (LO 2, 5) Nancys Nut House is a processor and distributor of a variety of different nuts. The company buys nuts from around the world and roasts, seasons, and packages them for resale. Nancys Nut House currently offers 15 different types of nuts in one-pound bags through catalogs and gourmet shops. The companys major cost is that of the raw nuts; however, the predominantly automated roasting and packing processes consume a substantial amount of manufacturing overhead cost. The company uses relatively little direct labor. Some of Nancys nuts are very popular and sell in large volumes, but a few of the newer types sell in very low sales volumes. Nancys prices its nuts at cost (including overhead) plus a markup of 40%. If the resulting prices of certain nuts are significantly higher than the market price, adjustments are made. Although the company competes primarily on the quality of its products, customers are price conscious. Data for the annual budget include manufacturing overhead of $6,000,000, allocated on the basis of each products direct labor cost. The annual budgeted direct labor cost totals $1,200,000. Based on the sales budget and raw materials standards, purchases and use of raw materials are expected to total $9,000,000 for the year. The unit costs of a one-pound bag of two of the companys products follows.

Raw materials Direct labor Cashews $4.20 0.30 Chestnuts $3.20 0.30 Nancy's controller believes that the traditional costing system may be providing misleading cost information, so she has developed the following analysis of the annual budgeted man- ufacturing costs. Budgeted Budgeted Activity Cost Driver Purchase orders Number of setups Number of batches Roasting hours Seasoning hours Packaging hours Activity Cost Purchasin Material handling Quality control Roasting Seasoning Packaging 1,800 600 96,100 33,600 26,000 11,460 $1,146,000 1,440,000 300,000 1,922,000 672,000 520,000 $6,000,000 Total manufacturing overhead cost