Bronson Shrimp Farms, in Brewton, Alabama, has a Processing Department that processes ra...

Bronson Shrimp Farms, in Brewton, Alabama, has a Processing Department that processes raw shrimp into two products:

Headless shrimp

Peeled and deveined shrimp

Bronson recently submitted bids for two orders: (1) headless shrimp for a cruise line and (2) peeled and deveined shrimp for a restaurant chain. Bronson won the first bid, but lost the second. The production and sales managers are upset. They believe that Bronson’s state-of-the- art equipment should have given the company an edge in the peeled and deveined market. Consequently, production managers are starting to keep their own sets of product cost records.

Bronson is reexamining both its production process and its costing system. The existing costing system has been in place since 1991. It allocates all indirect costs based on direct labor hours. Bronson is considering adopting activity-based costing. Controller Heather Barefield and a team of production managers performed a preliminary study. The team identified six activities, with the following (department-wide) estimated indirect costs and cost drivers for 2010:

The raw shrimp are chilled and then cut. For headless shrimp, employees remove the heads, then rinse the shrimp. For peeled and deveined shrimp, the headless shrimp are further processed—the shells are removed and the backs are slit for deveining. Both headless shrimp and peeled and deveined shrimp are packaged in foam trays and covered with shrink wrap. Order-filling personnel assemble orders of headless shrimp as well as peeled and deveined shrimp.

Requirements

Form groups of four students. All group members should work together to develop the group’s answers to the three requirements.

(Carry all computations to at least four decimal places.)

1. Using the original costing system with the single indirect cost allocation base (direct labor hours), compute the total budgeted cost per package for the headless shrimp and then for the peeled and deveined shrimp. (Hint: First, Compute the indirect cost allocation rate— that is, the predetermined overhead rate. Then, compute the total budgeted cost per package for each product.)

2. Use activity-based costing to re-compute the total budgeted cost per package for the headless shrimp and then for the peeled and deveined shrimp. (Hint: First, calculate the budgeted cost allocation rate for each activity. Then, calculate the total indirect costs of (a) the entire headless shrimp product line and (b) the entire peeled arid deveined shrimp product line. Next, compute the indirect cost per package of each product. Finally, calculate the total Cost per package of each product.)

3. Write a memo to Bronson CEO Gary Pololu explaining the results of the ABC study. Compare the Costs reported by the ABC system with the costs reported by the original system. Point out whether the ABC system shifted costs toward headless shrimp or toward peeled and deveined shrimp, and explain why. Finally, explain whether Pololu should feel more comfortable making decisions using cost data from the original system or from the new ABC system.