CP 26-2 Identifying product cost distortion Beachside Beverages Company manufact
ID: 2567880 • Letter: C
Question
CP 26-2 Identifying product cost distortion Beachside Beverages Company manufactures soft drinks. Information about two products is as follows: Sales Price per Case Gross Profit per Case Volume 800,000 cases 0,000 cases $30 30 $12 12 Storm Soda Fizz Wiz It is known that both products have the same direct materials and direct labor costs per case. Beachside Beverages allocates factory overhead to products by using a single plantwide factory overhead rate, based on direct labor cost. Additional information about the two products is as follows: Storm Soda: 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. Lastly, the product is sold in large bulk (full truckload) orders. Fizz Wiz: 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. Lastly, the product is sold in small (less than full truckload) orders. Explain the product profitability report in light of the additional data.Explanation / Answer
Direct material cost & direct labor costs are same for both the products. But charging factory OH based on direct on direct lebor costs, ie. Total factory Ohs/Total no.of labor hrs.---- may not be a correct procedure & will affect the profitability of both the products. Actual Ohs incurred for Fizz seems to be more as ,even if it it involves almost the same activities in its production & sales as detailed below, it requires more elaborate work-load: Activities Storm Soda Fizz Process preparation Minor Extensive Sterilization Minor Extensive Ingredient purchase orders Local Foreign requiring import controls Formulation Simple Complex Quality control Easy to maintain Difficult to maintain Truck-loads Full Less than full Sold in Large bulk orders Small orders From the tabulation, it is evident that cost of OH per case of Fizz will be more that for Storm Soda & thus it may not be appropriate to charge the Ohs equally . In any case, the actual profitability of both the products is not the same in reality which will be understood if Ohs are allocated on the basis of activities required (Activity-Based Costing of Ohs)& not on the basis of only direct labor hrs.----- as is done at present.COGS per case will be more for Fizz.