(LO 2) Spreadwell Paint Company manufactures two high-quality base paints: an oil-based paint and a latex paint. Both are housepaints and are manufactured only in a neutral white color.
Spreadwell sells the white base paints to franchised retail paint and decorating stores where pigments are added to tint (color) the paint as the customer desires. The oil-based paint is made with organic solvents (petroleum products) such as mineral spirits or turpentine. The latex paint is made with water; synthetic resin particles are suspended in the water, and dry and harden when exposed to air.
Spreadwell uses the same processing equipment to produce both paints in different production runs. Between batches, the vats and other processing equipment must be washed and cleaned.
After analyzing the company’s entire operations, Spreadwell’s accountants and production managers have identified activity cost pools and accumulated annual budgeted overhead costs by pool as follows.
| Activity Cost Pools | Estimated Overhead |
| Purchasing | $240,000 |
| Processing (weighing and mixing, grinding, thinning and drying, straining) | 1,400,000 |
| Packaging (quarts, gallons, and 5-gallons) | 580,000 |
| Testing | 240,000 |
| Storage and inventory control | 180,000 |
| Washing and cleaning equipment | 560,000 |
| Total annual budgeted overhead | $3,200,000 |
Following further analysis, activity cost drivers were identified and their estimated use by product and activity were scheduled as follows.
| Activity Cost Pools | Cost Drivers | Estimated Cost Drivers per Activity | Estimated Use of Drivers per Product | |
| Oil-Based | Latex | |||
| Purchasing | Purchase orders | 1,500 orders | 800 | 700 |
| Processing | Gallons processed | 1,000,000 gallons | 400,000 | 600,000 |
| Packaging | Containers filled | 400,000 containers | 180,000 | 220,000 |
| Testing | Number of tests | 4,000 tests | 2,100 | 1,900 |
| Storing | Avg. gals. on hand | 18,000 gallons | 10,400 | 7,600 |
| Washing | Number of batches | 800 batches | 350 | 450 |
Spreadwell has budgeted 400,000 gallons of oil-based paint and 600,000 gallons of latex paint for processing during the year.
Instructions
a. Prepare a schedule showing the computations of the activity-based overhead rates.
b. Prepare a schedule assigning each activity’s overhead cost pool to each product.
c. Compute the overhead cost per unit for each product.
Assign overhead and compute unit costs.
