Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Managerial Accounting Expert

Performance Drinks: Applying Activity Based Costing

Background:

Performance Drinks, LLC is owned by Dave N. Port.  Performance Drinks produces a range of sports centered drinks. They start operations in 1993 shortly after Mr. Port graduated with his M.B.A. from Davenport University. The company saw early success as sports and fitness nutritional products gained new popularity in the year 1990’s. Financially the company is sound and has been wise in controlling their growth over the years. Though, within the last 18 months Mr. Port has noticed a drop in overall company profitability. This is especially troubling considering that the company has continued to experience top-line growth. Mr. Port and his management team have been considering making a new product line.  Though, such plans have been put on hold till they can figure out why their profits are shrinking.

Performance Drinks makes four different types of sports drinks. Those drinks are as shown below:

• Basic
• Hydration
• Intensity
• Post-Workout

Each of such drinks contains a slightly different nutritional profile and is targeted for various users and uses. The Basic drink has the least nutritional benefit and is targeted for general consumption. The Hydration product targets endurance athletes and specializes in hydration replacement. The Intensity product was designed with energy enhancement in mind. It serves the requirements of extreme athletes who require long durations of sustained energy. Lastly, the Post-Workout product is a nutritional replacement product that is usually used following exertion.

You are the Controller for Performance Drinks. You feel as though you have a good handle on the financial reporting and the overall company performance. Though, admittedly, your accounting information system has been designed to serve the requirements of external users from an aggregate perspective. To that end you utilize absorption costing exclusively within the organization. You recall studying the concept of Activity Based Management (ABM) and Activity Based Costing (ABC) while taking a managerial accounting course. You wonder if applying such ideas to your business would help to uncover the mystery of the disappearing profits.

You recall from your Management Accounting class that product costs are included of:

• Direct Materials
• Direct Labor
• Manufacturing Overhead

You do not suspect that anything strange is going with your direct costs. You do wonder, though, if a more thorough understanding of your indirect costs may be in order. Over a series of weeks you talk with a variety of employees, representing a multitude of functional areas, from within the company. Throughout those conversations you take careful note on what activities might be consuming resources and how such activities might be measured. You sharpen your pencil and start to unpack what you have learned. You begin with reviewing last month’s Product-Level Profit Report. That report is shown below:

223_performance drinks.jpg

As your primary area of focus is on the indirect costs you compile the given report which further details your overhead charges:

1007_performance drinks_2.jpg

Overhead Activities:

By using traditional costing techniques, which support your absorption costing system, you base overhead allocation on direct labor cost. Moreover, ‘fringe benefits’ are a function of direct labor cost.

As an outcome of your many meetings to discuss company overhead you find out that the majority of your indirect costs are associated to four primary activities. Those activities are equipment set-ups, production runs, production management and machine-hour capacity.  ‘Production Management’ refers to a number of items which are correlated to the number of products the company produces. Ultimately you find out that your key activities have the following usage patterns, as they pertain to the monthly overhead costs:

1092_monthly overhead costs.jpg

On reviewing budget data from the last budget cycle you discover that the monthly number of set-ups was estimated to be 85. The number of production runs was estimated to be 250. That monthly machine-hour capacity is presently at 20,000 machine-hours. Lastly, Performance Drinks produces a total of four products.

After talking with the Plant Manger you create the given usage data relative to products and activities:

80_product and activities.jpg

Requirements:

1) Based on all of the date provided, find out the cost driver rates for each of the four activities.

2) find out the per unit product costs for each of the four products. find out this cost using ABC allocation for overhead. Show the computation for each per unit product cost in detail.

3) Make a ‘Monthly Profit Report’. Create this report by using the results of your ABC overhead allocation.

4) Prepare a written ‘Management Report’ which describes to the management team what Activity Based Costing is, how it was used to generate the Monthly Profit Report (from requirement #3). Describe why the profit for each product is different when comparing the Traditional report with the ABC report.  Describe what the company might consider doing, based on all of this information, to stop the erosion of company profits.  Defend your recommendations with data.

Additional Consideration:

Mr. Port wonders what would happen to costs if plant capacity was shifted from 20,000 machine-hours a month to 40,000 machine-hours per month.

Requirements:

5) find out the new cost per unit for each of the products considering the increase in capacity.  Show the computation for each per unit product cost in detail.

6) What is the cost of the unused capacity if it is supposed that the company has 40,000 machine-hours of capacity but it using 20,000 machine-hours? Amend your ‘Management Report’ to comprise a discussion on how to best use the additional capacity.

Managerial Accounting, Accounting

  • Category:- Managerial Accounting
  • Reference No.:- M91418

Have any Question? 


Related Questions in Managerial Accounting

Wyoming community college has three divisions liberal arts

Wyoming Community College has three divisions: Liberal Arts, Sciences, and Business Administration. The college's comptroller is trying to decide how to allocate the costs of the Admissions Department, the Registrar's De ...

Problem 1 master budgetomega inc has developed the

Problem 1: Master Budget Omega, Inc. has developed the following sales forecast for the first six months of the coming year Month Sales (in units) January 30,000 February 50,000 March 70,000 April 80,000 May 60,000 June ...

Assignmentpart 1use the following data for questions 1 and

Assignment Part 1 Use the following data for questions 1 and 2. Fox Company manufactures a specialty line of belts. The company uses a job-order costing system. Cost detail for the job follow: Units produced 5,000 belts ...

Managerial accounting budgeting project- springthe

Managerial Accounting Budgeting Project- Spring The following is a Comprehensive Budgeting Problem. You and your team need to prepare a partial Master Budget and then continue on to analyze your data. This is an Excel ba ...

Managerial accounting assignment task specification-group

Managerial Accounting Assignment Task Specification- Group Report: "Measuring Performance and Management Control Systems" - A review of control systems reported in 2016 annual reports in Australian Public Companies. Subj ...

Your company has spent 390000 on research to develop a new

Your company has spent $390,000 on research to develop a new computer game. The firm is planning to spend $59,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized a ...

Tri-county cable services inc is organized with three

Tri-County Cable Services, Inc., is organized with three segments: Metro, Suburban, and Outlying. Data for these segments for the year just ended follow. Metro Suburban Outlying Service revenue $ 1,050,000 $ 850,000 $ 45 ...

Instructionsall assignments must be typed in a minimum 11

Instructions: All assignments must be typed in a minimum 11 font size into the assignment template question sheet (available on Moodle). Additional pages may be added as needed. There is no word limit, but be guided by t ...

Exploring potential research topicsdo the following to

Exploring Potential Research Topics Do the following to complete this assignment: • Based on your business experience and the information accumulated in this class, identify three possible research topics related to the ...

Managerial accountingvenus brewery is a craft brewery that

Managerial Accounting Venus Brewery is a craft brewery that produces a special light beer for ladies. The beer are processed sequentially in two departments (Department X and Department Y) before the final products are t ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro

Describe what you learned about the impact of economic

Describe what you learned about the impact of economic, social, and demographic trends affecting the US labor environmen