Implementing Activity-Based Costing (ABC) The case of a juice company The juice company is a medium-sized company producing four different flavors of juice, including two new flavors recently added on the ground they were in high demand by customers who were willing to pay a premium for them. Recently, under the pressure of shareholders about the poor financial performance, Grace Orland, manager of the juice company, has been concerned over the erosion of the recent financial results especially for the standard flavors (A and B) which used to earn a 20 per cent of profit margin. Richard Dunn, the manufacturing manager, was also excited to introduce the new flavors since they were expected to generate higher margins while using the same technology as standard flavors. However, he noticed that the introduction of new flavors added some technical complexities to the production process. For instance, unlike Flavors A & B, which were produced in huge volume and in long production runs, difficulties started to arise with the new flavors which were produced in smaller batches but required more changeovers and more production runs (see Exhibit 3). The juice company produced the different flavors in the same factory. Each flavor had a bill of materials that tracks the direct materials consumed by each flavor. Additionally, a cost sheet was used to track the direct labor expenses incurred at each operating step for each of the four flavors. All overhead costs were grouped at the plant level and arbitrarily allocated to each flavor based on direct labor cost. The rate was set at 400 % of direct labor costs (see Exhibit 2). Grace was intrigued by the behavior of their main competitors who were more interested in competing in, what appears according to the company's current costing system, to be low profit margin flavors (A and B) than in high profit margins (Flavors C &D). Such behavior has led the manager to question the accuracy of that costing system and to conclude that the current method of allocation of indirect costs may be distorting their product costs thereby causing inappropriate pricing. The manager hires you as a cost accounting trainee to investigate the root causes of the cost distortion and come up with actions and initiatives to address these issues. Grace promised to provide you with all the information you may need in your undertakings. Based on the topics you covered in your cost accounting class, you thought that Activity-Based Costing (ABC) may represent a strong tool to tackle the problem. To remedy the distortions caused by the traditional method of costing based on one single cost pool of indirect costs, you decided to implement Activity-based costing (ABC) method which focuses on the activities, how they are performed, and the resources they consumed and to assign activities costs to products based on how much demand each of these products puts on these 1