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ACC640 Case Study Week 2 Performance Drinks

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Question;ACCT640;? Managerial Accounting;Case;#2 ? Performance Drinks: Applying Activity Based Costing;Written;by;Tim;Bergsma, CMA, CFE;Assistant;Professor ? Accounting;Background;Performance Drinks, LLC is owned by;Dave N. Port. Performance Drinks;produces a variety of sports centered drinks.;They began operations in 1993 shortly after Mr. Port graduated with his;M.B.A. from Davenport University. The;company saw early success as sports and fitness nutritional products gained new;popularity in the 1990?s. Financially;the company is sound and has been wise in controlling their growth over the;years. However, within the last 18;months Mr. Port has noticed a drop in overall company profitability. This is especially troubling considering that;the company has continued to experience top-line growth. Mr. Port and his management team have been;considering developing a new product line.;However, those plans have been put on hold until they can figure out why;their profits are shrinking.;Performance Drinks makes four;different kinds of sports drinks. Those;drinks are as follows;?;Basic;?;Hydration;?;Intensity;?;Post-Workout;Each;of these drinks contains a slightly different nutritional profile and is;targeted for different users and uses.;The Basic drink has the least nutritional benefit and is targeted for;general consumption. The Hydration;product targets endurance athletes and specializes in hydration;replacement. The Intensity product was;designed with energy enhancement in mind. It serves the needs of extreme;athletes who need long durations of sustained energy. Lastly, the Post-Workout product is a;nutritional replacement product that is generally used following exertion.;You are the Controller for;Performance Drinks. You feel as though;you have a good handle on the financial reporting and the overall company;performance. However, admittedly, your;accounting information system has been designed to serve the needs of external;users from an aggregate perspective. To;that end you utilize absorption costing exclusively within the;organization. You recall studying the;concept of Activity Based Management (ABM) and Activity Based Costing (ABC);while taking a managerial accounting course.;You wonder if applying those ideas to your business would help to;uncover the mystery of the disappearing profits.;You recall from your Management;Accounting class that product costs are comprised of;?;Direct Materials;?;Direct Labor;?;Manufacturing Overhead;You;don?t suspect that anything strange is going with your direct costs. You do wonder, however, if a more thorough;understanding of your indirect costs may be in order. Over a series of weeks you talk with a;variety of employees, representing a multitude of functional areas, from within;the company. During those conversations;you take careful note on what activities might be consuming resources and how;those activities might be measured. You;sharpen your pencil and begin to unpack what you?ve learned. You start with reviewing last month?s Product-Level;Profit Report. That report is following;Since your primary area of focus is;on the indirect costs you compile the following report which further details;your overhead charges;Overhead Activities;Using;traditional costing methods, which support your absorption costing system, you;base overhead allocation on direct labor cost.;Furthermore, ?fringe benefits? are a function of direct labor cost.;As;a result of your many meetings to discuss company overhead you determine that;the majority of your indirect costs are related to four primary;activities. Those activities are;equipment set-ups, production runs, production management and machine-hour capacity. ?Production Management? refers to a number of;items that are correlated to the number of products the company produces. Ultimately you determine that your key;activities have the following usage patterns, as they pertain to the monthly;overhead costs;Upon;reviewing budget data from the last budget cycle you discover that the monthly;number of set-ups was estimated to be 85.;The number of production runs was estimated to be 250. That monthly machine-hour capacity is;presently at 20,000 machine-hours.;Lastly, Performance Drinks produces a total of four products.;After talking with the Plant Manger;you create the following usage data relative to products and activities;Requirements;1. Based;on all of the date provided, compute the cost driver rates for each of the four;activities.;2. Compute;the per unit product costs for each of the four products. Compute this cost;using ABC allocation for overhead. Show;the computation for each per unit product cost in detail.;3. Prepare;a ?Monthly Profit Report?, like the one provided on page 4 of this packet. Create this report using the results of your;ABC overhead allocation.;4. Prepare;a written ?Management Report? that explains to the management team what;Activity Based Costing is, how it was used to generate the Monthly Profit;Report (from requirement #3). Explain;why the profit for each product is different when comparing the Traditional;report with the ABC report. Explain what;the company might consider doing, based on all of this information, to stop the;erosion of company profits. Defend your;recommendations with data.;Additional;Consideration;Mr.;Port wonders what would happen to costs if plant capacity was shifted from;20,000 machine-hours a month to 40,000 machine-hours per month.;Requirements;5. Compute;the new cost per unit for each of the products considering the increase in;capacity. Show the computation for each;per unit product cost in detail.;6. What;is the cost of the unused capacity if it is assumed that the company has 40,000;machine-hours of capacity but it using 20,000 machine-hours? Amend your ?Management Report? to include a;discussion on how to best use the additional capacity.;Clarification on format and data;Clear;communication and professionalism are important. Defending your answer with data is;important.;?;An electronic copy of;this Case (this document) is available within Blackboard. Additionally, an Excel file, containing the;basic data for the case will be available within Blackboard.;?;You will create one;professional report. In that report you;should clearly label all of your answers.;Make your answers easy to read and find.;Imagine you were giving this report to your boss. Further imagine you have to lead your boss;and the executive team through your findings.;As;it pertains to requirement #4, include the ?Management Report? inside your;overall report. You will then have one;Word document as your final product. You will also have one Excel file.;?;Grading is based on;both accuracy (see rubric) and your ability to communicate your answers;professionally and clearly.;?;Use the following;naming structure for your files: last name_first initial_case2.docx. Of course your Excel file will have an.xls;suffix.;?;Double space your;report.;?;Put good thought into;how you organize your Excel document. Part of your grade will be based upon the;usability and layout of your Excel file. Imagine that have to give the;electronic copy of your Excel file to your boss, or a peer, to work with. Imagine that you could not coach them at all;on how to use your file. Is your file;organized and labeled so clearly that anyone could use it, easily, without;instructions from you? You want to strive;for that kind of clarity in your work.;?;Your report should have;a title page. Use APA 6th edition for guidance on title pages.;?;You will physically;hand-in your report. You will also upload to Blackboard both your Word document;and your Excel file.;?;Due date: Friday, December 6th at 6:00 PM EDT;?;Late submissions will;result in the following: 10% reduction;in score for each 24 hour period of being late (up to 3 days). After 3 days late zero credit will be earned.;?;As always please come;to me with learning questions. This project is a learning experience.;Rubric;This;project is worth 20% (200 points) of your overall course grade. I will convert;your scores to a 200 point scale.

 

Paper#48439 | Written in 18-Jul-2015

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