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Lays Potatoes (LP) processes potatoes into potato cuts at its highly automnted Noida Plant. It sells potatoes to the retail consumer market and to the

Lays Potatoes (LP) processes potatoes into potato cuts at its highly automnted Noida Plant. It sells potatoes to the retail consumer market and to the institutional market, which includes hospitals, cafeterias, and university dormitories. LP's existing costing system has a single direct-cost category (direct materials, which are the raw potatoes) and a single indirect-cost pool (production support). Support costs are allocated on the basis of kgs of pointo cuts processed. Support costs include packaging materials. The current month total actual costs for producing 10,000 kgs of potato cuts (9 000 for the retail market and 1 000 for the institutional market) are Direct materials used 1.7 0.000 Production support 983.000 The existing costing system does not distinguish between potato cuts produced for the retail and the institutional markets. At the end of current month, LP unsuccessfully bid for a large institutional contract. Its bid was reported to be 30 per cent above the winning bid. This feedback came as a shock because LP included only a minimum profit margin on its bid. Moreover, the Noida plant was acknowledged as the most efficient in the industry. As a result of its review process of the lost contract bid, LP decided to explore ways to refine its costing system. First, it identified that Rs 1,88,000 of the Rs 9,83,000 pertaining to packaging materials could be traced to individual jobs Rs1,80,000 for retail and Rs 8,000 for institutional). These costs will now be classified as direct material. The Rs 170,000 of direct materials used were classified for retail and institutional based on production. Second, it used ABC to examine how the two products (retail potato cuts and institutional potato cuts) used indirect support resources. The finding was that three activity areas could be distinguished. Cleaning Activity Area - LP uses 12,000 kgs of raw potatoes to yield 10,000 kgs of potato cuts. The cost-allocation base is kgs of raw potatoes cleaned. Costs in the cleaning activity area are Rs 1,20,000. Cutting Activity Area - LP processes raw potatoes for the retail market independently of those processed for the institutional market. The production line produces (a) 57 kgs of retail potato cuts per cutting-hour and (b) 110 kgs of institutional potato cuts per cutting-hour. The cost-allocation base is cutting-hours on the production line. Costs in cutting activity area are Rs 2,31,000. Packaging Activity Area - LP packages potato cuts for the retail market independently of those packaged for the institutional market. The packaging line packages (a) 20 kgs of retail potato cuts per packaging-hour and (b) 90 kgs of institutional potato cuts per packaging-hour. The cost-allocation based is packaging-hours on the production line. Costs in the packaging activity area are Rs 4,44,000.

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