Spread well Paint Company manufactures two high quality base paints: an oil based paint and a latex paint. Both are house paints and are manufactured in neutral white color only. Sprea dwell 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 from, thinned, and cleaned with organic solvents (petroleum products) such as mineral spirits or turpentine. The latex paint is made from, thinned, and cleaned with water; synthetic resin particles are suspended in the water and dry and harden when
exposed to the air.
Spread well 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, spread well’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 expected use by product and activity were scheduled as follows.
|
Expected Use of Drivers per Product |
||||
|
Activity Cost Pools |
Cost Drivers |
Expected Cost Drivers per Activity |
Oil Based |
Latex |
|
Purchasing |
Purchase orders |
1,500 orders |
800 |
700 |
|
Processing |
Gallons processed |
1,000,000 gals. |
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 gals. |
10,400 |
7,600 |
|
Washing |
Number of batches |
800 batches |
350 |
450 |
Spread well has budgeted 400,000 gallons of oil based paint and 600,000 gallons of latex paint for processing during the year.