Swiss Chocolate’s U.S. division will be diversifying its product line to include
ID: 2459199 • Letter: S
Question
Swiss Chocolate’s U.S. division will be diversifying its product line to include two product offerings, a basic plain milk-chocolate candy bar, and a fruit-infused high cacao content premium candy bar. The candy bars are processed through a molding operation in which molten chocolate is injected into a mold and cooled to room temperature, removed from the mold, and packaged for storage and bulk palletized shipment.
Below is information regarding the direct costs and volumes of the two major products:
Variable cost and volume data
Milk chocolate
Premium cacao
Raw materials
$0.50
$0.75
Direct labor
$0.25
$0.40
Selling and general
$0.05
$0.05
Volume in units
300,000
100,000
Sales prices of the two products are $2.65 for milk chocolate and $4.99 for premium cacao. The number of hours required to manufacture each unit was the same for both products.
After an interview process with the factory and production personnel, the division controller, Steve Smith, completed the following table. From its simple cost structure, the company decided to reconsider its overhead pool and reallocate on the basis of activity-based costing. Its simple overhead pool has been reclassified according to the ABC hierarchy within the following table:
Smith also noted the following percentage allocations of cost for the activities which are required to manufacture each product.
ABC cost allocation percentages
Milk chocolate
Premium cacao
Product development
20%
80%
Setup candy molding equipment
60%
40%
Equipment operations
75%
25%
Shipment preparation
70%
30%
Distribution
65%
35%
Administration
50%
50%
From the cost information provided, respond to the following questions:
1) Compute the cost of each product under the simple/traditional costing method. For period costs, use the same basis of allocation as factory overhead.
2) Compute the net operating profit margin of each product using the simple/traditional costing method.
3) Categorize the production activities under activity-based costing according to the cost hierarchy. Indicate the type of cost category that aligns with the activity.
4) Compute the total overhead and period cost allocation under ABC assumptions for each product.
5) Compute the per unit ABC cost of each product.
6) Compute the net profit margin of each product using the ABC costing method.
7) Compare the net profit margin of the products under the simple/traditional cost assignment and the ABC assignment for each product. Evaluate the difference.
8) Write a brief explanation (approximately two paragraphs) that Smith might deliver to management to justify the use of ABC for these two products.
Variable cost and volume data
Milk chocolate
Premium cacao
Raw materials
$0.50
$0.75
Direct labor
$0.25
$0.40
Selling and general
$0.05
$0.05
Volume in units
300,000
100,000
Explanation / Answer
Solution 7) Comparing the Net Profit margin by both Traditional and ABC costing method
Milk chocolate Premium cacao
As per Traditional method 47.5% 64%
As per ABC method 52.49% 56.14%
Difference + 4.99 (7.86)
Reason : More Factory overhead and period cost has been allocated to the Premium Cacao in ABC method than Traditional method of cost allocation.
Solution to 8) The ABC Costing method of assignment is more appropriate because 1. it has been drawn after good discussion with the production line personnels 2. it is based on the activity of the production 3. it is more critical classification of the Overhead.
Answer to S.no. Particulars Basis (in $) Milk chocolate ($) Premium cacao ($) 1) Volume (units) 300,000 100,000 Selling Price per unit 2.65 4.99 Variable cost per unit 0.80 1.20 Contribution per unit 1.85 3.79 Total contribution 555,000 379,000 Less: Total overhead and Period cost allocation on traditional manner on volume, being production hours same 177375 59125 Net Profit as per traditional allocation 377,625 319,875 2) Net Operating Profit Margin Net profit / Revenue * 100 47.5 % 64 % 3 & 4) Category of Activity Cost incurred Product development 25000 5000 20000 Setup candy molding equipment 30500 18300 12200 Equipment operations 77000 57750 19250 Shipment preparation 20000 14000 6000 Distribution 4000 2600 1400 Administration 80000 40000 40000 Alloction of Factory Overhead and Period Cost ABC method assignment 236,500 137,650 98,850 5) Total ABC Cost per Unit Total Variable Cost 240000 120000 Alloction of Factory Overhead and Period Cost 137650 98850 Total Cost 377,650 218,850 Total ABC Cost per Unit $1.2588 $2.1885 6) Revenue 795000 499000 Total Cost as per ABC assignment 377,650 218,850 Net Profit as per ABC assignment 417,350 280,150 Net Profit Margin using ABC Costing Method Net Profit / Revenue * 100 52.49% 56.14%Related Questions
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