5-53    Volume-Based Costing Versus ABC The California Cooking Oil Company (CCO) has been using machine-hours as the basis to determine overhead costs for all products. An ABC project team points out that the firm manufactures several products, each of which use significantly different factory sup- porting resources. As a start, the team suggests the following overhead cost pools, cost drivers, and estimated cost driver levels for manufacturing overheads:

 

  Overhead Cost Pool	  Cost Driver	Estimated Cost Driver Level	  Budgeted Overhead
Machine setups	Number of setups	100	$100,000
Materials handling	Number of barrels	8,000	80,000
Quality control	Number of inspections	1,000	200,000
Other overhead cost	Machine-hours	10,000	100,000

 

CCO has recently completed production of 500 barrels each of P5 and G23. P5 is a corn-based oil distributed primarily through supermarkets. G23 is made from olive oil, flaxseed oil, and other exotic ingredients and sold to up scale restaurants as a gourmet food. P5 and G23 are two of the firm’s many products. The production requires the following operations:

 

Number of Cost Drivers

 

Overhead Cost Pool Machine setups	P5 1 setup	G23 50 setups
Materials handling	500 barrels	500 barrels
Quality inspections	2 times	20 times
Machine-hours	1,000 hours	1,000 hours

 

Required

1.    Determine the overhead costs per barrel of P5 and G23 using the current single cost driver system based on machine-hours.

2.    Determine the overhead costs per barrel of P5 and G23 using the multiple cost driver system suggested by the ABC project team.

3.    Explain how the choice of costing system can be an important competitive factor for CCO. How can the costing system help the firm become more profitable and competitive?