Idaho Potatoes operates at capacity and processes potatoes into potato cuts at its highly automated Pocatello plant. It sells potatoes to the retail consumer market and to the institutional market, which includes hospitals, cafeterias, and university dormitories.

IPs simple costing system, which does not distinguish between potato cuts processed for retail and institutional markets, has a single direct-cost category (direct materials, i.e. raw potatoes) and a single indirect-cost pool (production support). Support costs, which include packaging materials, are allocated on the basis of pounds of potato cuts processed. The company uses 1,200,000 pounds of raw potatoes to process 1,000,000 pounds of potato cuts. At the end of 201X, IP unsuccessfully bid for a large institutional contract. Its bid was reported to be 30% above the winning bid. This feedback came as a shock because IP included only a minimum profit margin on its bid and the Pocatello plant was acknowledged as the most efficient in the industry.

As a result of its review process of the lost contract bid, IP decided to explore ways to refine its costing system. The company determined that 90% of the direct materials (raw potatoes) related to the retail market and 10% to the institutional market. In addition, the company identified that packaging materials could be directly traced to individual jobs ($180,000 for retail and $8,000 for institutional). Also, the company used ABC to identify three main activity areas that generated support costs: cleaning, cutting and packaging.

• Cleaning Activity Area The cost-allocation base is pounds of raw potatoes cleaned.
• Cutting Activity Area The production line produces (a) 250 pounds of retail potato cuts per cutting-hour. (b) 400 pounds of institutional potato cuts per cutting-hour. The cost-allocation base is cutting-hours on the production line.
• Packaging Activity Area The packaging line packages (a) 25 pounds of retail potato cuts per packaging-hour (b) 100 pounds of institutional potato cuts per packaging-hour. The cost-allocation base is packaging-hours on the production line.

The following table summarizes the actual cost for 201X before and after the preceding cost analysis:

	Before the cost analysis	After the cost analysis
		Production Support	Retail	Institutional	Total
Direct materials used
Potatoes	$150,000		$135,000	$15,000	$150,000
Packaging			180,000	8,000	188,000
Production Support	983,000
Cleaning		$120,000			120,000
Cutting		231,000			231,000
Packaging		444,000			444,000
Total	$1,133,000	$795,000	$315,000	$23,000	$1,133,000

1. Using the simple costing system, what is the cost per pound of potato cuts produced by IP?
2. Calculate the cost rate per unit of the cost driver in the (a) cleaning, (b) cutting, and (c) packaging activity areas.
3. Suppose IP uses information from its activity cost rates to calculate costs incurred on retail potato cuts and institutional potato cuts. Using the ABC system, what is the cost per pound of (a) retail potato cuts and (b) institutional potato cuts?
4. Comment on the cost differences between the two costing systems in requirement 1 and 3. How might IP use the information in requirement 3 to make better decisions?