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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Identifying product cost distortion

Peachtree Beverage Company manufactures soft drinks. Information about two products is as follows:

It is known that both products have the same direct materials and direct labor costs per Case. Peachtree Beverage allocates factory overhead to products by using a single plant-wide factory overhead rate, based on direct labor cost. Additional information about the two products is as follows:

Jamaican Punch: Requires extensive process preparation and sterilization prior to processing. The ingredients are from Jamaica, requiring complex import controls. The formulation is complex, and it is thus difficult to maintain quality. Finally, the product is produced in small production run sizes.

King Kola: Requires minor process preparation and sterilization prior to processing. The ingredients are acquired locally. The formulation is simple, and it is easy to maintain quality. Finally, the product Ls produced in large production run sizes.

Explain the weakness in the per-case product profitability report in light of the additional data.

To determine

Activity-Based Costing: Activity-Based Costing refers to the allocation of the factory overheads when there are numerous products and processes. Activity-based costing aims at assigning the costs among the products in a proportionate way.

To Explain: The weakness in the report by Company PB in light of additional data.

Explanation

The report by Company PB is showing incorrect information. Company PB is producing two products Jamaican Punch and King Kola. The additional data provided shows that an extensive process is required for production of Jamaican Punch, hence more activities are involved. In case of King Kola the production process is simple and fewer activities are involved...

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