Case Study : California Creamery. Compute The Full Production Cost

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Case 18-2: California Creamery

Compute the full production cost (per gallon) of the Polynesian Fantasy and Vanilla products using: Will’s old costing method

Utilizing Will’s old costing method, we see below the only difference between the costs (per gallon) of Polynesian Fantasy and Vanilla products was the 20 cent difference in the cost of direct material (DH). The overhead rate (OH) was 200 percent of direct labor (DL) dollars. Seeing that the direct labor dollars were $300,000, the next step in calculating the overhead rate is to multiply 300,000 by 2.00, or 200%, which gives us $600,000. To ensure our arithmetic is correct, we must divide the $600,000 by the $300,000 which equates to 2.00, or 200%, indicating our arithmetic was in fact correct.

Will’s old costing method

Polynesian Fantasy Cost (per gallon) Vanilla Cost (per gallon) DM $2.00 (.20 more) DM $1.80 (.20 less)
DL $1.20 DL $1.20
OH $2.40 ($1.20 x 200%) OH $2.40 ($1.20 x 200%)
Total $5.60 Total $5.40 Information used from Exhibit 2 in the text*

The new costing method (Louise’s suggestion)

As you can see, the new costing method (Louise’s suggestions) has a different layout, displays different costs, and is a bit more descriptive. Unlike Will’s old costing method, the new costing method (Louise’s suggestion) displays the calculations of cost driver rates.

New costing method (Louise’s suggestion) – Cost driver calculations

Activity Budgeted Cost ($000) Driver of the Activity’s Cost

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