Case Cost System Considerations for CANADA SNOWCONES LTD. Canada Snowcones owned and operated 20 retail frozen yogurt stores spread throughout Southern Ontario, from Toronto to Windsor. CSL's stores sold only high preureen yogurt. They offered an assortment of 35 different frozen yogurt flavours. A significant amount of the CSL flavours were special such as "Peanut Butter Scoacoal-Sush and Tropical Cheese Sensations. However, SL also sold a few of the classic frozen yogurt flavours, such as vanilla, milk chocolate, mint, and other grans. While some of the flavours were very popular, there were also some of the more peculiar flavours that had low total sales in terms of units. produced its own frozen yogurt. The founder of the company. Samantha Reynolds, had originally made the yogurt in her basement. But eventual growing demand led to Samantha nene part of factory for sus production. As CSL grew, Samantha was able to afford automated but more costly production equipment that blended the flavours and packaged the liquid frozen yogurt for freezing cus most significant production costs were for raw materials, particularly yogurt, brown sugar, and the special flavour ingredients and for the purchase operation, and maintenance of production equipment. A of Sus products had the same retail price, as customers could choose or combine any flavours by scoops. Samantha set the prices to generate on average a markup of 100% on average full production costs. CSLS 2019 budget included manufacturing overhead (MOH) of $450,000. To estimate product costs. Samantha spread this MOH Cost to products based on a proportion of the direct labour (DL) costs used in the production process. CSL's total DL costs for 2019 was $200,000, so Samantha charged the overhead products at a rate of MOH to total DL COSES Last week, Laura Horton, Samantha's babysitter for her daughter and the CEO of a large production form advised that Samantha's pricing strategy was not optimal Laura's was that the expenses for producing CSL's numerous flavours were not uniform. She thought those inconsistencies should be reflected in the prices charged, or CSL'S earnings would fluctuate as the combination of flavours sold varied 5 Laura proposed that Samantha reestimate product costs using activity-based costing. She recommended that Samantha identity the major activities whose costs were included in the companys MOH costs. Then she should apply these costs to products based on the products consumption of each of those activities. In response to Laura's suggestions, Samantha prepared the information presented below in Table 1 Samantha decided to hire your consulting firm to help calculate the costs of two demonstrative flavours as an experiment to see if Laura's activity based costing system suggested produced any significant contrasts. She asked Laura to take her best estimate as to where she might find the most material differences, if any existed. After Samantha described the products to her. Laura suggested that she use Peanut Butter Bacon and Chocolate as the test product examples. Table 2 provides data relevant to the Budete Adity Canada Scones Budgeted MOH Costs Bud Cost S0001 Over 300 5 12 3756 Act Purchasing Material Handling Mising Chiling Pedaging Quality Control Total MOH costa Canada Snowconeitd.-Budgeted MOH Costa Budgeted Cost Seco Dr s 50,000 Purchase Orders 5 71.250 Number of 5 $1,500 Mixing hours S181250 Olling hours $ 12,500 Padaging machine hours $ 13,500 Number of batches $ 450,000 Butted Actyl R9 1.56 920 1.156 1,020 Table 2 Canade Sucene udTwe Product Examples Peanut Butter Bacon Direct Material (OM) 5 2.20 per gallon Direct Labour 4 S 1.40 per gallon Budgeted Production and sales 1,500 paloma Size of Batch 100 pln Number of setup 1 perbach Se of Purchase Order 40 palons Time in mixer 0.40 hour per 100 gr Time in chiller 1.50 hour per 100 ans Time in package machine 0.50 hour per 100 Chocolate $ 1:50 per $ 1.40 pro Opo one 4.000 g 1 perbach 500 pm 0 20 hour per 100 1.50 hour per 100 gr 0.25 hour per 100 gr Case Questions 1. Utilizing the information above, calculate the full product cost (on a per gallon basis of the Peanut Butter Bacon and Chocolate Flavours utilizing a. Samantha's more traditional costing system. b. Laura's suggestion to use activity-based costing 2. What are the impacts, if there is any at all, of switching CSL's costing method in particular, are the any significant contrasts between traditional costing and activity-based costing in terms of a Their impact on costs for independent products. Their effect on CSL's total firm income? (assuming everything else remains the same, such as production and sales prices) b If there are significant contrasts, why are they present? If there are no significant contrasts, why are they not present? 3 What would you recommend to be Samantha's next step, based on this analysis? Explain