Better Essays

Case Study#1
Problems facing by Strategic Marketing Unit Two (SMU2) of Fine Food:
Unfairly allocated costing system
Unreliable performance evaluation standard leads to undervaluation of SMU2 and negative motivational effect on employees.
Key Findings:
Fine Foods allocates some period costs (including sales and marketing costs, media and sales promotion costs, and freight out cost) based on weight of product sold. SMU2 thus seems less profitable because the main product of SMU2 is Product MP and its special orders, which are relatively dense and bulky. This allocation method makes SMU2 seems less profitable.
Fine Foods evaluate the performance of SMUs based on operating profit, which includes several uncontrollable cost elements …show more content…

However, since Fine Food is already producing the product, it values this market.
There are many advantages about special orders. First of all, the raw material always has a ready stock and can be kept in storage for a fairly long time. Secondly, the finished product MP can be kept frozen up to a year, therefore, there will not be a large spoilage cost. Based on these factors, special orders have a high flexibility to schedule production. Also, since special orders are mostly planned and have large quantities, it brings Fine Food a steady flow of work and output.
Special orders also have disadvantages. It is a steady flow of work for Fine Food for now, but if the food distributor in Mexico stops ordering Product MP, it could cause a loss for SMU2 and Fine Food.
A by-product is a product that is a minor part of the primary production process, having a minor resale value in comparison to the value of the primary product being manufactured. For special orders, it is a by-product to SMU1 and SMU3.
Joint Product:
Joint products are multiple products generated by a single production process at the same time. These products incur undifferentiated joint costs until a split-off point, after which each product incurs separate processing. Prior to the split-off point, costs can only be allocated to the joint products. For special orders, joint products could be the product MP that are produced to be used in the U.S. and

Get Access
Get Access