Chocolate Bars, Inc. (CBI), manufactures creamy deluxe chocolate candy bars. The firm has developed three distinct products: Almond Dream, Krispy Krackle, and Creamy Crunch. CBI is profitable, but management is quite concerned about the profitability of each product and the product costing methods currently employed. In particular, management questions whether the overhead allocation base of direct labor-hours accurately reflects the costs incurred during the production process of each product. In reviewing cost reports with the marketing manager, Steve Hoffman, who is the cost accountant, notices that Creamy Crunch appears exceptionally profitable and that Almond Dream appears to be produced at a loss. This surprises both him and the manager, and after much discussion, they are convinced that the cost accounting system is at fault and that Almond Dream is performing very well at the current market price. Steve decides to hire Jean Sharpe, a management consultant, to study the firm’s cost system over the next month and present her findings and recommendations to senior management. Her objective is to identify and demonstrate how the cost accounting system might be distorting the firm’s product costs. Jean begins her study by gathering information and documenting the existing cost accounting system. It is rather simplistic, using a single overhead allocation base—direct labor-hours—to calculate and apply overhead rates to all products. The rate is calculated by summing variable and fixed overhead costs and then dividing the result by the number of direct labor-hours. The product cost is determined by multiplying the number of direct labor-hours required to manufacture the product by the overhead rate and adding this amount to the direct labor and direct material costs. CBI engages in two distinct production processes for each product. Process 1 is labor intensive, using a high proportion of direct materials and labor. Process 2 uses special packing equipment that wraps each individual candy bar and then packs it into a box of 24 bars. The boxes are then packaged into cases, each of which has six boxes. Special packing equipment is used on all three products and has a monthly capacity of 3,000 cases, each containing 144 candy bars (= 6 boxes × 24 bars). To illustrate the source of the distortions to senior management, Jean collects the cost data for the three products, Almond Dream, Krispy Krackle, and Creamy Crunch. Almond Dream Krispy Krackle Creamy Crunch Product costs Labor-hours per case 8.1 4.1 1.0 Total cases produced 1,000 1,000 1,000 Material cost per case $ 9.10 $ 3.10 $ 9.60 Direct labor cost per case $ 48.60 $ 24.60 $ 6.00 Labor-hours per product 8,100 4,100 1,000 Total overhead = $75,000 Total labor-hours = 13,200 Direct labor costs per hour = $6.00 Allocation rate per labor-hour = (a). Costs of products Material cost per case $ 9.10 $ 3.10 $ 9.60 Direct labor cost per case 48.60 24.60 6.00 Allocated overhead per case(to be computed) (b) (c) (d) Product cost (e) (f) (g) CBI recently adopted a general policy to discontinue all products whose gross profit margin percentages [(Gross margin ÷ Selling price) × 100] were less than 10 percent. By comparing the selling prices to the firm’s costs and then calculating the gross margin percentages, Jean could determine which products, under the current cost system, should be dropped. The current selling prices of Almond Dream, Krispy Krackle, and Creamy Crunch are $96.00, $60.00, and $28.00 per case, respectively. Overhead will remain $75,000 per month under all alternatives. Required: a-1. Complete the table under the current cost system. a-2. Determine which product(s), if any, should be dropped. Reg A1 Complete the table under the current cost system. (Round your intermediate calculations and final answers to 2 decimal places. Negative values should be indicated with a minus sign.) Almond Dream Krispy Krackle Creamy Crunch Product costs: Labor-hours per case 8.10 4.10 1.00 Total cases produced 1,000 1,000 1,000 Material cost per case $9.10 $3.10 $9.60 Direct labor cost per case $48.60 $24.60 $6.00 Labor-hours per product 8,100 4,100 1,000 Total overhead $75,000 Total labor-hours 13,200 Direct labor costs per hour $6.00 Allocation rate per labor-hour Costs of products: Material cost per case $9.10 $3.10 $9.60 Direct labor cost per case 48.60 24.60 6.00 Allocated overhead per case Product cost Selling price Gross profit margin percentage % % % Reg A2 Determine which product(s), if any, should be dropped. Almond Dreamradio button unchecked1 of 3 Krispy Krackleradio button unchecked2 of 3 Creamy Crunchradio button unchecked3 of 3
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Chocolate Bars, Inc. (CBI), manufactures creamy deluxe chocolate candy bars. The firm has developed three distinct products: Almond Dream, Krispy Krackle, and Creamy Crunch.
CBI is profitable, but management is quite concerned about the profitability of each product and the product costing methods currently employed. In particular, management questions whether the overhead allocation base of direct labor-hours accurately reflects the costs incurred during the production process of each product.
In reviewing cost reports with the marketing manager, Steve Hoffman, who is the cost accountant, notices that Creamy Crunch appears exceptionally profitable and that Almond Dream appears to be produced at a loss. This surprises both him and the manager, and after much discussion, they are convinced that the cost accounting system is at fault and that Almond Dream is performing very well at the current market price.
Steve decides to hire Jean Sharpe, a management consultant, to study the firm’s cost system over the next month and present her findings and recommendations to senior management. Her objective is to identify and demonstrate how the cost accounting system might be distorting the firm’s product costs.
Jean begins her study by gathering information and documenting the existing cost accounting system. It is rather simplistic, using a single overhead allocation base—direct labor-hours—to calculate and apply overhead rates to all products. The rate is calculated by summing variable and fixed overhead costs and then dividing the result by the number of direct labor-hours. The product cost is determined by multiplying the number of direct labor-hours required to manufacture the product by the overhead rate and adding this amount to the direct labor and direct material costs.
CBI engages in two distinct production processes for each product. Process 1 is labor intensive, using a high proportion of direct materials and labor. Process 2 uses special packing equipment that wraps each individual candy bar and then packs it into a box of 24 bars. The boxes are then packaged into cases, each of which has six boxes. Special packing equipment is used on all three products and has a monthly capacity of 3,000 cases, each containing 144 candy bars (= 6 boxes × 24 bars).
To illustrate the source of the distortions to senior management, Jean collects the cost data for the three products, Almond Dream, Krispy Krackle, and Creamy Crunch.
| Almond Dream | Krispy Krackle | Creamy Crunch | ||||
| Product costs | ||||||
| Labor-hours per case | 8.1 | 4.1 | 1.0 | |||
| Total cases produced | 1,000 | 1,000 | 1,000 | |||
| Material cost per case | $ | 9.10 | $ | 3.10 | $ | 9.60 |
| Direct labor cost per case | $ | 48.60 | $ | 24.60 | $ | 6.00 |
| Labor-hours per product | 8,100 | 4,100 | 1,000 | |||
| Total overhead = $75,000 | ||||||
| Total labor-hours = 13,200 | ||||||
| Direct labor costs per hour = $6.00 | ||||||
| Allocation rate per labor-hour = (a). | ||||||
| Costs of products | ||||||
| Material cost per case | $ | 9.10 | $ | 3.10 | $ | 9.60 |
| Direct labor cost per case | 48.60 | 24.60 | 6.00 | |||
| Allocated overhead per case(to be computed) | (b) | (c) | (d) | |||
| Product cost | (e) | (f) | (g) | |||
CBI recently adopted a general policy to discontinue all products whose gross profit margin percentages [(Gross margin ÷ Selling price) × 100] were less than 10 percent. By comparing the selling prices to the firm’s costs and then calculating the gross margin percentages, Jean could determine which products, under the current cost system, should be dropped. The current selling prices of Almond Dream, Krispy Krackle, and Creamy Crunch are $96.00, $60.00, and $28.00 per case, respectively. Overhead will remain $75,000 per month under all alternatives.
Required:
a-1. Complete the table under the current cost system.
a-2. Determine which product(s), if any, should be dropped.
Reg A1
Complete the table under the current cost system. (Round your intermediate calculations and final answers to 2 decimal places. Negative values should be indicated with a minus sign.)
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- Reg A2
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Determine which product(s), if any, should be dropped.
Almond Dreamradio button unchecked1 of 3 Krispy Krackleradio button unchecked2 of 3 Creamy Crunchradio button unchecked3 of 3
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