Swiss Chocolateâs U.S. division will be diversifying its productline to include two product offerings, a basic plain milk-chocolatecandy bar, and a fruit-infused high cacao content premium candybar. The candy bars are processed through a molding operation inwhich molten chocolate is injected into a mold and cooled to roomtemperature, removed from the mold, and packaged for storage andbulk palletized shipment. Below is information regarding the directcosts and volumes of the two major products:
Variable Cost and VolumeData MilkChocolate Premium Cacao
RawMaterials $0.50 $0.75
DirectLabor $0.25 $0.40
Selling andGeneral $0.05 $0.05
Volume inUnits 300,000 100,000
Sales prices of the two products are $2.65 for milk chocolateand $4.99 for premium cacao. The number of hours required tomanufacture each unit was the same for both products. After aninterview process with the factory and production personnel, thedivision controller, Steve Smith, completed the following table.From its simple cost structure, the company decided to reconsiderits overhead pool and reallocate on the basis of activity-basedcosting. Its simple overhead pool has been reclassified accordingto the ABC hierarchy within the following table:
IndirectManufacturing:
ProductDevelopment $25,000
Setup Candy Molding Equipment $12,000
EquipmentOperations $15,500
Factory Insurance andUtilities:
EquipmentOperations $31,500
Depreciation â Machinery and Factory
Setup Candy Molding Equipment $18,500
EquipmentOperations $20,000
Repairs and Maintenance â Factory:
EquipmentOperations $10,000
Distribution $4,000
Selling, Marketing and Distribution Expenses
ShipmentPreparation $20,000
Administration $20,000
General and Administrative Expenses
Administration $60,000
Smith also noted the following percentage allocations of costfor the activities which are required to manufacture eachproduct.
ABC Cost AllocationPercentages MilkChocolate Premium Cacao
ProductDevelopment 20% 80%
Setup Candy MoldingEquipment 60% 40%
EquipmentOperations 75% 25%
ShipmentPreparation 70% 30%
Distribution 65% 35%
Administration 50% 50%
From the cost information provided, respond to the followingquestions:
1. Compute the cost of each product under the simple/traditionalcosting method. For period costs, use the same basis of allocationas factory overhead.
2. Compute the net operating profit margin of each product usingthe simple/traditional costing method.
3. Categorize the production activities under activity-basedcosting according to the cost hierarchy. Indicate the type of costcategory that aligns with the activity.
4. Compute the total overhead and period cost allocation underABC assumptions for each product.
5. Compute the per unit ABC cost of each product.
6. Compute the net profit margin of each product using the ABCcosting method.
7. Compare the net profit margin of the products under thesimple/traditional cost assignment and the ABC assignment for eachproduct. Evaluate the difference.
8. Write a brief explanation (approximately two paragraphs) thatSmith might deliver to management to justify the use of ABC forthese two products.
Swiss Chocolateâs U.S. division will be diversifying its productline to include two product offerings, a basic plain milk-chocolatecandy bar, and a fruit-infused high cacao content premium candybar. The candy bars are processed through a molding operation inwhich molten chocolate is injected into a mold and cooled to roomtemperature, removed from the mold, and packaged for storage andbulk palletized shipment. Below is information regarding the directcosts and volumes of the two major products:
Variable Cost and VolumeData MilkChocolate Premium Cacao
RawMaterials $0.50 $0.75
DirectLabor $0.25 $0.40
Selling andGeneral $0.05 $0.05
Volume inUnits 300,000 100,000
Sales prices of the two products are $2.65 for milk chocolateand $4.99 for premium cacao. The number of hours required tomanufacture each unit was the same for both products. After aninterview process with the factory and production personnel, thedivision controller, Steve Smith, completed the following table.From its simple cost structure, the company decided to reconsiderits overhead pool and reallocate on the basis of activity-basedcosting. Its simple overhead pool has been reclassified accordingto the ABC hierarchy within the following table:
IndirectManufacturing:
ProductDevelopment $25,000
Setup Candy Molding Equipment $12,000
EquipmentOperations $15,500
Factory Insurance andUtilities:
EquipmentOperations $31,500
Depreciation â Machinery and Factory
Setup Candy Molding Equipment $18,500
EquipmentOperations $20,000
Repairs and Maintenance â Factory:
EquipmentOperations $10,000
Distribution $4,000
Selling, Marketing and Distribution Expenses
ShipmentPreparation $20,000
Administration $20,000
General and Administrative Expenses
Administration $60,000
Smith also noted the following percentage allocations of costfor the activities which are required to manufacture eachproduct.
ABC Cost AllocationPercentages MilkChocolate Premium Cacao
ProductDevelopment 20% 80%
Setup Candy MoldingEquipment 60% 40%
EquipmentOperations 75% 25%
ShipmentPreparation 70% 30%
Distribution 65% 35%
Administration 50% 50%
From the cost information provided, respond to the followingquestions:
1. Compute the cost of each product under the simple/traditionalcosting method. For period costs, use the same basis of allocationas factory overhead.
2. Compute the net operating profit margin of each product usingthe simple/traditional costing method.
3. Categorize the production activities under activity-basedcosting according to the cost hierarchy. Indicate the type of costcategory that aligns with the activity.
4. Compute the total overhead and period cost allocation underABC assumptions for each product.
5. Compute the per unit ABC cost of each product.
6. Compute the net profit margin of each product using the ABCcosting method.
7. Compare the net profit margin of the products under thesimple/traditional cost assignment and the ABC assignment for eachproduct. Evaluate the difference.
8. Write a brief explanation (approximately two paragraphs) thatSmith might deliver to management to justify the use of ABC forthese two products.
Related questions
Swiss Chocolateâs U.S. division will be diversifying its productline to include two product offerings, a basic plain milk-chocolatecandy bar, and a fruit-infused high cacao content premium candybar. The candy bars are processed through a molding operation inwhich molten chocolate is injected into a mold and cooled to roomtemperature, removed from the mold, and packaged for storage andbulk palletized shipment.
Below is information regarding the direct costs and volumes ofthe two major products:
Variable cost and volume data | Milk chocolate | Premium cacao |
Raw materials | $0.50 | $0.75 |
Direct labor | $0.25 | $0.40 |
Selling and general | $0.05 | $0.05 |
Volume in units | 300,000 | 100,000 |
Sales prices of the two products are $2.65 for milk chocolateand $4.99 for premium cacao. The number of hours required tomanufacture each unit was the same for both products.
After an interview process with the factory and productionpersonnel, the division controller, Steve Smith, completed thefollowing table. From its simple cost structure, the companydecided to reconsider its overhead pool and reallocate on the basisof activity-based costing. Its simple overhead pool has beenreclassified according to the ABC hierarchy within the followingtable:
| ABC Cost Pools | Indirect manufacturing labor | Factory Insurance & Utilities | Depreciation -- Machinery and factory | Repairs and maintenance -- factory | Selling, marketing and distrubution expenses | General & administrative expenses |
| Product Development | $ 25,000 | |||||
| Setup Candy Molding Equipment | $ 12,000 | $ 18,500 | ||||
| Equipment Operations | $ 15,500 | $ 31,500 | $ 20,000 | $ 10,000 | ||
| Shipment Preparation | $ 20,000 | |||||
| Distribution | $ 4,000 | |||||
| Administration | $ 20,000 | $ 60,000 | ||||
| Totals | $ 52,500 | $ 31,500 | $ 38,500 | $ 14,000 | $ 40,000 | $ 60,000 |
Smith also noted the following percentage allocations of costfor the activities which are required to manufacture eachproduct.
ABC cost allocation percentages | Milk chocolate | Premium cacao |
Product development | 20% | 80% |
Setup candy molding equipment | 60% | 40% |
Equipment operations | 75% | 25% |
Shipment preparation | 70% | 30% |
Distribution | 65% | 35% |
Administration | 50% | 50% |
From the cost information provided, respond to the followingquestions:
Compute the cost of each product under the simple/traditionalcosting method. For period costs, use the same basis of allocationas factory overhead.
Compute the net operating profit margin of each product usingthe simple/traditional costing method.
Categorize the production activities under activity-basedcosting according to the cost hierarchy. Indicate the type of costcategory that aligns with the activity.
Compute the total overhead and period cost allocation under ABCassumptions for each product.
Compute the per unit ABC cost of each product.
Compute the net profit margin of each product using the ABCcosting method.
Compare the net profit margin of the products under thesimple/traditional cost assignment and the ABC assignment for eachproduct. Evaluate the difference.
Write a brief explanation (approximately two paragraphs) thatSmith might deliver to management to justify the use of ABC forthese two products.
Your paper should meet the following requirements:
2-3 pages in length
