atkinson5e_ch04

atkinson5e_ch04 - Activity-Based Cost Systems Chapter 4...

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Activity-Based Cost Systems Chapter 4
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Simple Cost Accounting Systems: Ericson Ice Cream Company Example Ericson had been the low-cost producer of chocolate and vanilla ice cream, with profit margins exceeding 20% of sales Several years ago Ericson expanded their business by extending their product line into products with premium selling prices
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Ericson Ice Cream Company Example Five years ago strawberry ice cream was introduced The same basic production technology Could be sold at a price that was 3% higher than for blue and black pens Last year mocha-almond ice cream was added Could be sold at a 10% price premium The controller of Ericson was disappointed with the most recent quarter’s financial results
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Total Profitability by Product vanilla chocolate strawberry Mocha- almond Total Units 50,000 40,000 9,000 1,000 100,000 Price $ 4.50 $ 4.50 $ 4.65 $ 4.95 Sales $225,000 $180,000 $41,850 $4,950 $451,800 Material 75,000 60,000 14,040 1,650 150,690 Labor 30,000 24,000 5,400 600 60,000 Overhead 90,000 72,000 16,200 1,800 180,000 Total Mfg. Expenses 195,000 156,000 35,640 4,050 390,690 Gross Margin $ 30,000 $ 24,000 $ 6,210 $ 900 $ 61,110 G.M. % 13.3% 13.3% 14.8% 18.2% 13.5%
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Management’s Concern The controller wondered whether the company should continue to deemphasize the chocolate and vanilla products and keep introducing new specialty premium flavors Ericson’s manufacturing manager commented on how the introduction of specialty flavors had changed the production environment
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Ericson’s Indirect Cost Allocation Because it was a small company and historically had produced only a narrow range of products, Ericson used a simple costing system All the plant’s indirect expenses were aggregated at the plant level and allocated to products based on each product’s direct labor cost Currently the cost system’s overhead burden rate was 300% of direct labor cost Before the new specialty products were introduced, the overhead rate was only 200% of direct labor cost
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Ericson’s Cost System Ericson’s management accountants designed the system years ago when: Production operations were mostly manual Total indirect costs were less than direct labor costs Cooper’s two products had similar production volumes and batch sizes
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Changes in the Production Environment Direct labor costs have decreased and indirect expenses have increased as a result of automation As specialty low-volume products were added, Ericson needed: More scheduling More setups More quality control personnel A computer to track orders and product specifications
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An Outdated Cost System Ericson operates with only a single cost center Even if Ericson used multiple production and service department cost centers, it could still encounter severe distortions in its reported product costs
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Reason for Cost Distortions schedule machine and production runs perform setups inspect produced items
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atkinson5e_ch04 - Activity-Based Cost Systems Chapter 4...

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