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ACCT640 case 2 Performance Drinks: Applying Activity Based Costing




Question;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 professionalismare 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: Tuesday, October 8th;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#49523 | Written in 18-Jul-2015

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