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201-Wk4-ABC-S'12-SOL TO PROB-1

# 201-Wk4-ABC-S'12-SOL TO PROB-1 - V ABC Extra problems A...

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Chap. 5 - page 27 V. ABC – Extra problems A. NESTLE COMPANY Henri Nestle founded the Nestle Company (www.nestle.com) in 1866 with the introduction of baby formula. Today Nestle is “the undisputed leader in the food industry with more than 470 factories around the world.” Nestle is known for is chocolate products. Suppose the chocolate division has developed three deluxe chocolate candy bars that are manufactured using the same facility: Almond Dream, Krispy Krackle, and Creamy Crunch. The manager of this facility, Steve Stanley is concerned about the profitability of each product and the product costing method currently employed. Currently, all overhead is allocated using direct labor hours as the allocation base. In reviewing the numbers Steve noticed that Creamy Crunch appears very profitable, while Almond Dream shows a loss. Steve is surprised at this result since Almond Dream seems to be performing well. Steve has gathered the following information about the three products: Almond Dream Krispy Krackle Creamy Crunch Selling price \$85.00 \$55.00 \$35.00 Direct labor hours per unit 6 DLH/unit 3 DLH/unit 1 DLH/unit Total units produced per month 1,000 1,000 1,000 Material cost per unit \$8.00 \$2.00 \$9.00 Total overhead is \$69,500 per month and does not vary with the level of production or the different products produced. The direct labor wage rate is \$7.00 per direct labor hour. Chap. 5 - page 28 A1. Compute the per unit gross margin for the Almond Dream using the existing simplistic cost system where all overhead is allocated using direct labor hours. Confirm Steve’s observation that with this system the Almond Dream appears to be produced at a loss. OH rate = \$69,500 6(1,000) + 3(1,000) + 1(1,000) = \$6.95/DLH Price \$ 85.00 DM (8.00) DL 6(\$7) (42.00) OH 6(\$6.95) (41.70) Per unit GM \$ (6.70)

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Chap. 5 - page 29 A. NESTLE COMPANY (Cont.) A2. Steve Stanley has decided to hire Jean Sharpe, a management consultant, to devise a new product costing system. Jean Sharpe has determined that it is important to use several different cost pools for allocating the overhead. She notes that \$18,000 of the overhead originates from the equipment used, and should be allocated on the basis of machine hours. A case (unit) of Almond Dream requires 12 hours of machine time, Krispy Krackle requires 6 hours, and Creamy Crunch requires 2 hours. Additionally, Jean notices that the \$32,000 per month is spent on the rental of 10,000 square feet of factory space. Almond Dream is assigned 1,000 square feet, Krispy Krackle is assigned 4,000 square feet, and Creamy Crunch is assigned 5,000 square feet. Jean decides to allocate the rental cost on the basis of the square feet used by each product. Batch size is 500 units, independent of the type of chocolate candy being produced. Time to set up the machinery, however, differs by the product--Almond Dream requires 30 hours of set-up time per batch; Krispy Krackle requires 15 hours of set up time per batch and Creamy Crunch requires 5 hours of set-up time per batch. Jean has decided to allocate the \$5,000 in setup costs on the basis of total setup time for the product.
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201-Wk4-ABC-S'12-SOL TO PROB-1 - V ABC Extra problems A...

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