Question

Option #2: Applying Activity-Based Costing South of the Border's frozen food division will be changing its product line to include two product offerings, a bean and cheese empanada and a shredded beef and cheese empanada. The empanadas are formed through a molding operation in which a flour tortilla is inserted into a heated mold, one of the two pre- made purchased fillings is inserted through a small hole in the mold into the shell of the tortilla, item is deep fried, cooled to room temperature, and then the finished product is removed from the mold and packaged for frozen storage and bulk palletized shipment. Below is information regarding the direct costs and volumes of the two major products: Variable Cost and Volume Data Bean & Cheese Shredded Beef Raw materials $0.40 $0.75 Direct Labor $0.30 $0.45 Selling and General $0.05 $0.05 Volume in units 300,000 200,000 Sales prices of the two products are $1.95 for the bean and cheese empanada and $2.99 for the shredded beef empanada. The number of hours required to manufacture each unit was the same for both products. After interviewing the Factory and Production personnel, the division controller, Karen Solomon, prepared the following data table. From its simple cost structure, the company decided to reconsider its overhead pool and reallocate based on activity-based costing. Its simple overhead pool has been reclassified according to the ABC hierarchy within the following table:

Option #2: Applying Activity Based Costing #5-8.

Answer 1

ABC allocation:
Cost	Total Amount	Bean&Cheese	Shredded Beef
Prod Devel	5700	1140	4560
Setup shell mol	14900	8940	5960
Setup filling eq	11750	5875	5875
Setup frying eq	2400	1200	1200
Eq. operation	66700	50025	16675
Shipment prep.	14000	9800	4200
Distri.	5100	3315	1785
Admin.	71000	35500	35500
Total overhead	191550	115795	75755
Traditional Method of allocation:
Selling Price		1.95	2.99
Less:Direct Vari cost:		0.75	1.25
Contribution per unit		1.2	1.74
Volume of sale		300000	200000
total Contribution		360000	348000
Less: Allocated cost		95775	95775
Net Profit		264225	252225
Profitability		Higher
ABC Method of allocation:
Selling Price		1.95	2.99
Less:Direct Vari cost:		0.75	1.25
Contribution per unit		1.2	1.74
Volume of sale		300000	200000
total Contribution		360000	348000
Less: Allocated cost		115795	75755
Net Profit		244205	272245
Profitability			Higher
		Bean&Cheese	Shredded Beef
5) Unit cost under ABC:
Direct cost		0.75	1.25
Allocated OH		0.39	0.38
Total Unit cost		1.14	1.63
		Bean&Cheese	Shredded Beef
6)
Selling Price		1.95	2.99
Less:Direct Vari cost:		0.75	1.25
Contribution per unit		1.2	1.74
Volume of sale		300000	200000
total Contribution		360000	348000
Less: Allocated cost		115795	75755
Net Profit		244205	272245
7) Net Profit:
As per Traditional		264225	252225
As per ABC		244205	272245
Difference		20020	-20020
Under, the traditional method of allocation, the Bean & Cheese
have the higher Net Profit whereas in the ABC method of allocation
the Shredded Beef carries the higher Net Profit because as per
micro allocation of overhead under ABC method, Shredded Beef
is consuming less overhead to Bean & Cheese.
8) Soloman had delivered to management because Shredded Beef
has been consuming less overhead to Bean & Cheese, which has
not being recognised in the Traditional method of overhead allocation,
where overhead is allocated on the number of hours devoted to each
product ie. equally distributed.
The bifercation of the overhead according to the activities and distributing
it as per consumption of each activity by each product in production would
allocate the cost properly between the products. Thus, the ABC method
has been best choosen to allocate overhead to Traditional method of
overhead allocation.