Exhibit 1

Thriftway Ice Cream, Inc.

2004 Budgeted Manufacturing Overhead Costs

Activity Budgeted Cost ($000) Driver of the activitys costs Budgeted activity level for the cost driver

Purchasing $80 Purchase orders 909

Material handling 95 Setups 1,846

Blending 122 Blender hours 1,000

Freezing 175 Freezer hours 1,936

Packaging 110 Packaging machine hours 1,100

Quality control 18 Batches 286

Total manufacturing

overhead costs $600

Exhibit 2

Thriftway Ice Cream, Inc.

Two Product Examples (2004 Data)

Cherry Blaze CoCo Almond

Direct material $2.00/gallon $1.80/gallon

Direct labor 1.20/gallon 1.20/gallon

Budgeted production and sales 2,000 gallons 100,000 gallons

Batch size 100 gallons 2,500 gallons

Setups 3 per batch 3 per batch

Purchase order size 50 gallons 1,000 gallons

Blender time 0.6 hour per 100 gallons 0.3 hour per 100 gallons

Freezer time 1.0 hour per 100 gallons 1.0 hour per 100 gallons

Packaging machine time 0.3 hour per 100 gallons 0.2 hour per 100 gallons

Compute the full production cost (per gallon) of the Polynesian Fantasy and Vanilla products using: ?

a. Bills old costing method spreading his overhead cost to products on a proportion of direct labor used in production process, total direct labor 2004 was $300K, so Bill charged overhead to products at rate of 200% of direct labor costs?

b. The new costing method (Dans suggestion of activity-based cost system)? Dan suggested to Identify major activities whose costs were included in companies overhead costs, then apply those costs to products based on products consumption and exhibit 1 prepared for Dans suggestion.

What are the effects, if any, of changing the companys costing method? Specifically, are the differences between the two-costing methods material in terms of:

a. their effect on individual product costs?

b. their effect on total company profits? (Assume no changes in any operating decisions, such as prices and production volumes.)

If there are material differences, why do they exist? If there are no material differences, why do they not exist?

What should Bill do now?

Notes:

Thriftway Ice Cream, Inc. owned and operated 14 retail ice cream stores spread throughout Denver, CO. Stores sold high quality, premium ice cream. They offered 20 different ice cream flavors. Many of the Thriftway flavors were unique such as Cherry Blaze and Coco Almond. But Thriftway also sold a few traditional ice cream flavors, such as vanilla, chocolate, neopolitan. Some flavors sold well, but a few of the unique sold in low volumes. Thriftway produced its own ice cream. Originally the ice cream was produced in the home of the companys founder, Bill Henderson. But the company outgrew the home set up, and Bill had since leased a warehouse to contain Thriftway production activities. As Thriftway had grown, Bill had been able to upgrade more expensive, automated manufacturing equipment that blended the flavors and packaged the liquid ice cream concentrate in preparation for freezing. Thriftways most significant production costs were for raw materials, particularly cream, sugar, and the special flavor ingredients, and for the purchase, operation, and maintenance of the production equipment. All of Thriftways products were sold at the same retail price. Bill set the prices to yield, roughly, a markup of 100% on average full production costs. Thriftways 2004 budget included manufacturing overhead of $600,000. Thriftways total direct labor cost for 2004 was $300,000, Bill charged the overhead to products at a rate of 200% of direct labor costs.