Reference no: EM13920138
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Assessment Description
COMMONWEALTH OF AUSTRALIA Copyright Regulations 1969
This material has been reproduced and communicated to you by or on behalf of Kaplan Business School pursuant to Part VB of the Copyright Act 1968 (‘Act').
The material in this communication may be subject to copyright under the Act. Any further reproduction or communication of this material by you may be the subject of copyright protection under the Act.
Kaplan Business School is a part of Kaplan Inc., a leading global provider of educational services. Kaplan Business School Pty Ltd ABN 86 098 181 947 is a registered higher education provider CRICOS Provider Code 02426B.
Assessment Information
CASE STUDY 1
Costello Corporation produces two grades of wine from grapes that it buys from California growers.
It produces and sells roughly 600,000 gallon jugs per year of a low cost, high-volume product called Valley Fresh.
Costello also produces and sells roughly 200,000 gallons per year of a low-volume, high-cost product called Costello Valley. Costello Valley is sold in 1-liter bottles.
Based on recent data, the Valley Fresh product has not been as profit table as Costello Valley.
Management is considering dropping the inexpensive Valley Fresh line so it can focus more attention on the Costello Valley product.
The Costello Valley product already demands considerably more attention than the Valley Fresh line.
Frankie Costello, president and founder of Costello, is sceptical about this idea.
He points out that for many decades the company produced only the Valley Fresh line, and that it was always quite profitable.
It wasn't until the company started producing the more complicated Costello Valley wine that the profitability of Valley Fresh declined.
Prior to the introduction of Costello Valley, the company had simple equipment, simple growing and production procedures, and virtually no need for quality control.
Because Costello Valley is bottled in 1-liter bottles, it requires considerably more time and effort, both to bottle and to label and box, than does Valley Fresh.
The company must bottle and handle 4 times as many bottles of Costello Valley to sell the same quantity as Valley Fresh, since there are approximately 4 litres in a gallon.
Valley Fresh requires 1 month of aging; Costello Valley requires 1 year.
Valley Fresh requires cleaning and inspection of equipment every 2,500 gallons; Costello Valley requires such maintenance every 250 gallons.
Frankie has asked the accounting department to prepare an analysis of the cost per gallon using the traditional costing approach and using activity-based costing.
The following information was collected.
Valley Fresh
page2image18312
Costello Valley
Direct materials per gallon
page2image21080 page2image21400
$1.35
page2image22328 page2image22648
$3.60
Direct labour cost per gallon
$0.75
$1.50
Direct labour hours per gallon
0.05
page2image30496
0.10
page2image31424
Total direct labour hours
30,000
20,000
page2image35336
Activity Cost Pool
page2image38160
Cost Driver
page2image39232 page2image40056
Estimated overheads
page2image41288
Expected use of cost drivers
page2image42912 page2image43232
Expected use of cost drivers per product
page2image44904
Valley Fresh
page2image46448
Costello Valley
Grape processing
Cart of grapes
$146,000
8,000
6,000
page2image53320
2,000
Aging
Total months
$420,000
3,000,000
600,000
page2image60080
2,400,000
Bottling and corking
page2image62712
Number of bottles
page2image64296
$210,000
1,400,000
page2image66088
600,000
page2image67488
800,000
Labelling and boxing
page2image69800
Number of bottles
page2image71384
$140,000
1,400,000
page2image73176
600,000
page2image74576
800,000
Maintain and inspect equipment
Number of inspections
page2image78656 page2image79152
$234000
page2image80720
1,040
240
page2image82856
800
page2image84920
Required:
Write a memo to Frankie Costello providing a brief description of what is activity based costing as well as an explanation of how the traditional approach can result in distortions.
Hint: You should support your discussion by calculating and comparing the total manufacturing cost per gallon for both products under both traditional costing systems as well activity based costing.
COMMONWEALTH OF AUSTRALIA Copyright Regulations 1969
This material has been reproduced and communicated to you by or on behalf of Kaplan Business School pursuant to Part VB of the Copyright Act 1968 (‘Act'). The material in this communication may be subject to copyright under the Act.
Any further reproduction or communication of this material by you may be the subject of copyright protection under the Act.
Kaplan Business School is a part of Kaplan Inc., a leading global provider of educational services. Kaplan Business School Pty Ltd ABN 86 098 181 947 is a registered higher education provider CRICOS Provider Code 02426B.
page2image93616
Assessment Information
CASE STUDY 2
Curtis Rich, the cost accountant for Hi-Power Mower Company, recently installed activity based costing at Hi-Power's St. Louis lawn tractor (riding mower) plant where three models-the 8-horsepower Bladerunner, the 12-horsepower Quickcut, and the 18-horsepower Supercut-are manufactured.
Curtis's new product costs for these three models show that the company's traditional costing system had been significantly under costing the 18-horsepower Supercut.
This was due primarily to the lower sales volume of the Supercut compared to the Bladerunner and the Quickcut.Before completing his analysis and reporting these results to management,
Curtis is approached by his friend Ed Gray, who is the production manager for the 18-horsepower Supercut model. Ed has heard from one of Curtis's staff about the new product costs and is upset and worried for his job because the new costs show the Supercut to be losing, rather than making, money.
At first, Ed condemns the new cost system, whereupon Curtis explains the practice of activity based costing and why it is more accurate than the company's present system. Even more worried now, Ed begs Curtis, "Massage the figures just enough to save the line from being discontinued. You don't want me to lose my job, do you?
Anyway, nobody will know." Curtis holds firm but agrees to recompute all his calculations for accuracy before submitting his costs to management.
Required:
Draft a response from Curtis to Ed Gray.
page3image12720
COMMONWEALTH OF AUSTRALIA Copyright Regulations 1969
This material has been reproduced and communicated to you by or on behalf of Kaplan Business School pursuant to Part VB of the Copyright Act 1968 (‘Act'). The material in this communication may be subject to copyright under the Act. Any further reproduction or communication of this material by you may be the subject of copyright protection under the Act. Kaplan
Business School is a part of Kaplan Inc., a leading global provider of educational services. Kaplan Business School Pty Ltd ABN 86 098 181 947 is a registered higher education provider CRICOS Provider Code 02426B.
Assessment Information
CASE STUDY 3
Gonzalez Company produces one product, Olpe. Because of wide fluctuations in demand for Olpe, the Assembly Department experiences significant variations in monthly production levels.
The annual master manufacturing overhead budget below is based on 300,000 direct labour hours. In July, 27,500 labour hours were worked.
The master manufacturing overhead budget for the year and the actual overhead costs incurred in July are as follows.
Overhead costs
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Master budget
page4image7448
Actual results for July
Variable
page4image10728 page4image11208 page4image11696 page4image12496
• Indirect labour
$ 300,000