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
Overhead costs need to be accounted for this way we can understand just how much cost goes into producing each unit. There are other cost factors that contribute to the product aside from labor and material. Since the projected and the actual sales volumes do not align Kelly should be concerned with the other
14. A decision to work closely with a limited number of suppliers for the purpose of ensuring that the proper materials are available at the optimal time is an example of:
B. 1. The impact of costs on the decision to move forward with the new Maui Sandal line is as follows: As the production continues, the hours needed for each batch, or individual pair, will begin to decrease. By continuing to produce this line the total labor costs will continue to decrease, but most likely, at a slower rate as more sandals are produced. This data can help the company decide employment levels, capacity, costs, and their pricing of this particular merchandise in the open market. The company predicts that it will take 1,000 labor hours for production to complete for the first batch, with 50 total batches between month 1 and month 4.
|Price of Belgium cocoa beans|Quantity of Belgium cocoa beans |Quantity of Belgium cocoa beans |Total Demanded |
1. For financial accounting purposes, what is the total amount of product costs incurred to make 10,000 units?
Wilkerson employs a Normal Cost System, which means that they use predetermined overhead rates along with actual costs for direct material and direct labor. Normal costing systems are appropriate when overhead costs are a relatively small percentage of total manufacturing costs and product diversity is limited. For Wilkerson, normal costing does not make sense. Overhead costs make up over 50 percent of total manufacturing costs and their product offering is relatively more diverse. This indicates that the current accounting system in place may be distorting costs significantly. Supporting data:
As will be seen below, the cost to manufacture a single unit of the architectural windows is much greater than the standard window (note the negative contribution margin of the architectural windows). This is contrary to the volume-based method where standard windows were more expensive. Under ABC, It makes sense that the architectural window is more expensive as it is generally more labor-intensive, requires more direct material and consumes more fixed resources than its standard window counterpart. ABC is able to capture these costs by tracing the activities to the correct product. The following section will analyze the individual components of the income statement in further detail. What is realized is that cost information is severely distorted under volume-based allocation approach, leading Doug to make uninformed decisions. As it currently stands, architectural windows would be unable to bring the Texas plant into a profitable position.
Abby Conroy was tasked with calculating an effective quote for Breeland Ltd., she chose the activity based accounting costing system since it more accurately captures the related costs. A special order was placed by Breeland Ltd. with Ace Fertilizer Company. The did not plan to order more of this product in the future. Based on Ace’s policy, the special order included disposal costs for any used materials in the event no other orders existed for the unused materials at the time the Breeland contract was signed. Abby correctly calculated the total direct material and labor costs and accurately arrived at the indirect costs using the ABC method and used cost activity pools that make sense for the company and
• This cost method does not provide the best system for JDCW’s cost allocation. By using only three overhead rates the present system grossly undermines the true production costs since other activities of the production process are not acknowledged.
The costing approach should be based on per Transaction Basis rather than on per kit or per pound basis because of the following reasons:
The above graph suggests that volume based computation of overhead costs does not reflect the real overhead costs based on actual production per product line (computed maximum in excess over actual). On the other hand, if we follow the allocation of overhead costs based on prime costs as illustrated in Exhibit 2 of the case, we need to consider other quantitative factors: 1. No data is available to determine the amount of raw materials used in producing each of the products. While we can assume that the production of small, colored glass ornaments uses fewer raw materials (e.g. glass) than large, colored glass ornaments, the amount of glass used to produce specialty ornaments cannot be derived from the facts of the case. 2. There is also no data available to determine the number of direct labor hours consumed for producing each product type, although evidently, specialty ornaments use more direct labor hours. Based on the above considerations, we deem it inaccurate to base overhead on prime costs, a common practice in traditional costing. In addition,
Q6: How much production fixed expenses should be allocated to 1 kg of "complete meal"? Give a specific number and your logic to support the
Businesses – from manufacturing, merchandising and service industries alike – take careful considerations for their costing systems. Setting-up competitive prices in the market can be a result of proper costing methods. Misallocation of costs may lead to incorrect price estimates, continuous production of unprofitable products, and ineffective processing schedules. In this case study, we will discuss the costing methods Zauner Ornaments are currently using and upon conclusion, it will enable us to distinguish the advantages and disadvantages of each costing method.
6. Calculate the volume-based (traditional) cost per reel for grades A-D identified in Exhibit 1.