Performance Drinks Case 2 Qureshi

Performance Drinks
Case #2 Activity Based Costing
Davenport University





Rabia Qureshi
Professor John Davis
June 18, 2014
Performance Drinks Case 2 Qureshi
Requirements:
1. Based on all of the data provided, compute the cost driver rates for each of the four
activities.
Two pieces of information are required to compute the cost-driver rate: Activity cost and activity
volume. Activity Cost / Activity Volume = Cost-Driver Rate
COST DRIVER RATES FOR EACH ACTIVITY

Particulars Amount
Equipment
Set Ups
Production
Runs
Number of
Products
Machine-
Hour
Capacity
Indirect Labor $ 55,000.00 $ 11,000.00 $ 24,750.00 $ 8,250.00 $ 11,000.00
Fringe Benefits on
Indirect Labor
$ 24,750.00 $ 4,950.00 $ 11,138.00 $ 3,713.00 $ 4,950.00
Utilities $ 5,000.00 $ 250.00 $ 3,250.00 - $ 1,500.00
Processing
Equipment -
Depreciation
$
10,000.00
-
$
10,000.00
- -
Preventive
Maintenance
$
10,000.00
$
4,000.00
$
3,000.00
-
$
3,000.00
Information
Technology
$
23,000.00
$
2,300.00
$
3,450.00
$
16,100.00
$
1,150.00
Total
$
127,750.00
$
22,500.00
$
55,588.00
$ 28,063.00
$
21,600.00
Total Cost Driver
Quantity
85 250 4 20000
Cost Driver Rate
$
264.71
$
222.35
$ 7,015.75
$
1.08




Performance Drinks Case 2 Qureshi
2. Compute the per unit product costs for each of the four products. Compute this cost using
ABC allocation for overhead. Show the computation for each per unit product cost in
detail.
PER UNIT COST FOR EACH
PRODUCT

Basic Hydration Intensity
Post
Workout
Total
Direct Costs
Direct Materials 40,000 50,000 31,000 33,000 154,000
Direct Labor 25,000 20,000 10,000 18,000 73,000
Fringe Benefit on Direct
Labor
11,250 9,000 4,500 8,100 32,850
Manufacturing
Overheads

Equipment Set Ups 15 15 50 5 85
Cost Driver Rate 264.71 264.71 264.71 264.71 264.71
Total 3,970.59 3,970.59 13,235.29 1,323.53 22,500.00
Production Runs 125 65 35 25 250
Cost Driver Rate 222.35 222.35 222.35 222.35 222.35
Total 27,793.75 14,452.75 7,782.25 5,558.75 55,587.50
Number of Products 1 1 1 1 4
Cost Driver Rate 7,015.63 7015.625 7015.625 7015.625 7015.625
Total 7,015.63 7,015.63 7,015.63 7,015.63 28,062.50
Machine-Hour Capacity 9000 4000 3000 4000 20000
Cost Driver Rate
$
1.08
$
1.08
$
1.08
$
1.08
$
1.08
Total $ 9,720.00 $ 4,320.00 $ 3,240.00
$
4,320.00
$
21,600.00
Total
$ 48,499.96 $ 29,758.96 $ 31,273.17
$
18,217.90
$
127,750.00
Manufacturing
Overheads
Total Product Costs $ 124,749.96 $ 108,758.96 $ 76,773.17
$
77,317.90
$
387,600.00
Performance Drinks Case 2 Qureshi
Volume 100,000.00 80,000.00 45,000.00 60,000.00 285,000.00
Per Unit Costs $ 1.25 $ 1.36 $ 1.71 $ 1.29 $ 1.36

3. Prepare a Monthly Profit Report, like the one provided on page 4 of this packet. Create
this report using the results of your ABC overhead allocation.
MONTHLY PROFIT REPORT USING ABC


Basic Hydration Intensity
Post
Workout
Total
REVENUE

Sales 125,000 120,000 74,250 93,000 $ 412,250.00
COSTS
Direct Materials 40,000 50,000 31,000 33,000 $ 154,000.00
Direct Labor 25,000 20,000 10,000 18,000 $ 73,000.00
Fringe Benefit on
Direct Labor
11,250 9,000 4,500 8,100 $ 32,850.00
Manufacturing
Overheads
48,500 29,759 31,273 18,218 $ 127,750.00
TOTAL COSTS $ 124,750.00 $ 108,759.00 $ 76,773.00 $ 77,318.00 $ 387,600.00
GROSS MARGIN $ 250.00 $ 11,241.00 $ (2,523.00) $ 15,682.00 $ 24,650.00
GROSS MARGIN
RATIO
0.2 9.37 -3.4 16.86 5.98





Performance Drinks Case 2 Qureshi
4. Prepare a written Management Report that explains to the management team what
Activity Based Costing is, how it was used to generate the Monthly Profit Report (from
requirement #3). Explain why the profit for each product is different when comparing
the Traditional report with the ABC report. Explain what the company might consider
doing, based on all of this information, to stop the erosion of company profits. Defend
your recommendations with data.

Activity Based Costing (ABC) is a way to designate costs to products or services based on
which resources are utilized in the production process. The concept is that the resources must be
allocated based on the actual job or activity. Traditionally accounting factored in overhead costs
such as marketing, electricity, water, gas, etc. ABC requires costs to be assigned based on the
actual activity or work done. This ultimately makes it fairer (Activity-based).
When comparing the profits on the aforementioned reports, there are big variances in the profit
margins per product. This is due to the way the overhead was charged differently due to ABC.

Basic Hydration Intensity Post Workout Total
ABC Report

GROSS MARGIN 250 11,241 -2,523 15,682 24,650
GROSS MARGIN
RATIO
0.20 9.37 -3.40 16.86 5.98
Traditional Report

GROSS MARGIN 5,000 6,000 11,250 2,400 24,650
GROSS MARGIN 4.00 5.00 15.15 2.58 5.98
Performance Drinks Case 2 Qureshi
RATIO
Change

GROSS MARGIN -4,750 5,241 -13,773 13,282 -
GROSS MARGIN
RATIO
-3.80 4.37 -18.55 14.28 -


Basic Hydration Intensity Post Workout Total
ABC Report

Manufacturing
Overheads
48,500 29,759 31,273 18,218 127,750
Traditional Report

Manufacturing
Overheads
43,750 35,000 17,500 31,500 127,750
Change

Amount 4,750 -5,241 13,773 -13,282 -
Percentage 10.86 -14.97 78.70 -42.17 -





Performance Drinks Case 2 Qureshi
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. Compute 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.
NEW COST PER UNIT CONSIDERING INCREASE
IN CAPACITY

Particulars Basic Hydration Intensity
Post
Workout
Total
Direct Costs
Direct Materials $40,000 $50,000 $31,000 $33,000 $154,000
Direct Labor 25,000 20,000 10,000 18,000 73,000
Fringe Benefit on Direct
Labor
11,250 9,000 4,500 8,100 32,850
Manufacturing
Overheads

Equipment Set Ups 15 15 50 5 85
Cost Driver Rate 264.71 264.71 264.71 264.71 264.71
Total 3,970.59 3,970.59 13,235.29 1,323.53 22,500.00
Production Runs 125 65 35 25 250
Cost Driver Rate 222.35 222.35 222.35 222.35 222.35
Total 27,793.75 14,452.75 7,782.25 5,558.75 55,587.50
Number of Products 1 1 1 1 4
Cost Driver Rate 7,015.63 7015.625 7015.625 7015.625 7015.625
Total 7,015.63 7,015.63 7,015.63 7,015.63 28,062.50
Machine-Hour Capacity 9000 4000 3000 4000 20000
Performance Drinks Case 2 Qureshi
Cost Driver Rate 0.54 0.54 0.54 0.54 0.54
Total 4,860.00 2,160.00 1,620.00 2,160.00 10,800.00
Total Manufacturing
Overheads
$ 43,639.96 $ 27,598.96
$
29,653.17
$ 16,057.90 $116,949.99
Total Product Costs
$
119,889.96
$
106,598.96
$
75,153.17
$
75,157.90
$
376,800.00
Volume 100,000.00 80,000.00 45,000.00 60,000.00 285,000.00
Per Unit Costs $ 1.20 $ 1.33 $ 1.67 $ 1.25 $ 1.32












Performance Drinks Case 2 Qureshi
6. What is the cost of the unused capacity if it is assumed that the company has 40,000
machine-hours of capacity but it using 20,000 machine-hours? Amend your
Management Report to include a discussion on how to best use the additional capacity.

Total Unabsorbed Hours 20,000
Cost per hour 0.54
Total Costs 20,000 x 0.54 = $10,800

The machine hours need to be used towards high yield products that create more profit.
Post-Workout with gross profit of around 17%, seems to be the most profitable. Hydration with
gros profit of >9% is next most profitable. Therefore, the additional hours should be used in
producing these products.


Resources:
Activity-based costing. (2009, June 29). The Economist. Retrieved June 18, 2014, from
http://www.economist.com/node/13933812#sthash.PtL9siE7.dpbs
Product costing and cost allocations. (n.d.). . Retrieved June 18, 2014, from
http://classes.bus.oregonstate.edu/spring-
07/ba422/Management%20Accounting%20Chapter%2011.htm