California Creamery, Inc Californis and operated ice cream stores spread throughout cotproduced its own ioe cream. the ioe in the garage of the California, from San Luis Obispo to San Diego, CCIs fonder, Win Forgey But the coT's and Will had since leased building to house production As CCI had grown, Will stores sold only the highest-quality, ultra-premium ice Geum. They offered 25 ditlement ice cream Many of CCI flavors were "exotic" such as "poly- bad been able to afford more expensive, inalomated equipment dat bended the flavom liquid ior creaan in prepention for fieez- Desian Fanouy" Mango Lemon supeeme, "Multi-Nut Twist." But CCI also sold a few traditional creand flavors, such as vadilla, chocolate, straw. ing, CCI's most production oosts were materials, particularly cream, ugr, aad the we- bery, and coffee, some ofthe flavors were very popu- lar, but a few cree exode davors sold in low volumes cisl navor ingredients, and for the saquisition tion, and maintenance of the production equipment. Merchant and Wim A van der price Copyright by Kenneth A All of CCI's products were sold st de same real will set the prices to yield roughly,amaricup of 100 percent on average full production costs Ccis 2004 budget included system. Toward that end, she suggested that he iden- tity the major activities whose costs were in 5600,000. To entimate product Wifi spread overhead cost to products on a be should apply those costs to based oo the of each of those activities. In response to proportion of the direct labor used in the production process. CCI direct labor cost tur 2004 was s300,000 so will prepared shown in Exhibit barged the overhead to products at rate of 200 per- of direct labor costs. day neighbor and a coatroller of a small mnnaiac. Then, again following Louise's sugestion, be de- cided to calculate the oosts oftwo ilustrative products to see if Louise s new cost system turing company, suggested that Will's pricing palicy idea produced any material differences. He asked was nor very smart, Louise's intuition was that the Louise to take her best guess as to wbere be might find costs of producing CCTsvarious flavors were very dif the most significant differences, if any existed After ferent. She thought those differences should be re- will described the products to her, Louise suggested flected in the prices charged, or CCI's Polyaesian Fantasy and Vanilla test vary as the mix of products sold varied. product examples. Exhibit 2 provides dria Perinem to that will reestimate product costs using what she called an ences between the two costing methods material in estions a. Their effoct on individual product costs? I, Compute the full production cost (per gallon) of b. Their effect on total company the Polynesian Fantasy and Vanilla Exhibit 1 2 no changes in any operating decisions, such using prices and production volumes.) a. Will's old costing method. If there are material diferences, why do they existn b. The new costing method (Louise's suggestion) if there are no material differences, why do they not 2. What are the effocts, if amy, of changing the com- panys costing method? Specifically, are the differ- 3 What should will do now? Explain
