M Inbox (2,403) - septicia9@gmail.c x e Home - Montclair State University X M5: Case - Ace Fertilizer Compan x + V O X C montclair.instructure.com/courses/167546/assignments/1546108?module_item_id=2950930 : M Gmail YouTube Maps Page 1 of 5 - ZOOM + IMA Case IMA INSTITUTE OF EDUCATIONAL MANAGEMENT Case Journal Study ACCOUNTANTS Advancing the Profession ISSN 1940-204X Ace Fertilizer Company: Ethical Cost Allocations and Price Determination Jerry Kreuze Sheldon Langsam Western Michigan University Western Michigan University INTRODUCTION contracts. Completed, initialed customer contracts then proceed to Tom Brennen for his ultimate approval and signature. Having a double undergraduate major in Accounting All special orders at Ace Fertilizer follow a prescribed and Integrated Supply Management and an MBA from a billing formula. These special orders, unless specific renowned business school qualified Abby Conroy, CMA, authorization is obtained from Tom Brennen himself, for her position at Ace Fertilizer Company. She has been must be billed at 80 percent over the cost of the order. employed at Ace Fertilizer for the past three years, and is a Tom Brennen rarely allows exceptions to this formula, highly respected employee. Her hard work and dedication as sufficient demand exists for Ace Fertilizer's operating to detail resulted in a series of rapid promotions. Currently, capacity. Although Ace maintains an extensive raw materials Required Questions: K 29F Clear Search 8:14 PM 2/4/2023 22MInbox (2,403) - septicia9@gmail.c x e Home - Montclair State University X M5: Case - Ace Fertilizer Compan x + V O X montclair.instructure.com/courses/167546/assignments/1546108?module_item_id=2950930 IS : M Gmail YouTube Maps M5-Ace_fertiziler.pdf & Download A Alternative formats 1 Info X Close Page 1 of 5 O ZOOM + renowned business school qualified Abby Conroy, CMA, authorization is obtained from Tom Brennen himself, for her position at Ace Fertilizer Company. She has been must be billed at 80 percent over the cost of the order. employed at Ace Fertilizer for the past three years, and is a Tom Brennen rarely allows exceptions to this formula, highly respected employee. Her hard work and dedication as sufficient demand exists for Ace Fertilizer's operating to detail resulted in a series of rapid promotions. Currently, capacity. Although Ace maintains an extensive raw materials Abby is assistant director of manufacturing and is primarily inventory, on occasion these special orders require Abby to responsible for special customer orders. Meeting the needs order materials specific to the order. These materials are of customers in manufacturing special orders has become acquired in the most economical order quantity available. a very profitable portion of Ace's operations. These special The special order is billed for the entire cost of the specially orders sometimes complement, but more frequently are ordered materials, even if unused quantities remain. totally unrelated to, Ace's principal business of producing Customers are given the option of keeping these unused lawn and garden fertilizer. Ace Fertilizer actively seeks materials, but virtually all companies decline. An exception special orders in a highly competitive market, driven more to that policy is only allowed when another confirmed order by quality and on-time completion than price. Ace has exists when the initial order is signed that requires the use established itself as an industry leader by consistently of those excess materials. In that case, Tom Brennen, as a meeting customer expectations. matter of fairness, insists that the cost of those materials be The ability to meet the needs of customers through prorated among special orders. manufacturing special orders was the concept of Ace's founders, What Abby likes especially about Ace Fertilizer is its and now passive owners, James Stegink and Norman Light. family atmosphere. In fact, Abby has been invited several Both have engineering degrees and are considered by many times by George Smilee to his family get-togethers. George to be quite the "tinkerers." Abby reports to the director of is close to his family, most of whom live within a 10-mile manufacturing, George Smilee. The manufacturing operations radius. The family has regular get-togethers attended are managed by Tom Brennen, the chief operating officer of faithfully by George and his two brothers. George's family Ace Fertilizer. has become very close since the untimely death of George's In her role as assistant director, Abby is responsible for the father last year. His brothers are all self-employed in a design, bidding, manufacture, and ultimate delivery of special variety of businesses, and on occasion Ace Fertilizer does orders to customers. Abby develops and completes all special special orders for them. order contracts. George Smilee initials his approval of these Required Questions . 29F 8:44 PM Clear Search 2/4/2023 22MInbox (2,403) - septicia9@gmail.c x e Home - Montclair State University X M5: Case - Ace Fertilizer Compan x + V O X montclair.instructure.com/courses/167546/assignments/1546108?module_item_id=2950930 IS : M Gmail YouTube Maps M5-Ace_fertiziler.pdf & Download A Alternative formats 1 Info X Close Page 2 of 5 O ZOOM + Abby has become very skilled at computing the cost of to help determine the most profitable special orders and special orders. She fully realizes a special order includes a customers, which activities and processes are value-added, variety of costs, including direct and indirect costs. Abby and where efforts toward improvements can be made. Abby knows that proper project cost determination mandates especially likes this latter approach when assigning indirect inclusion of all of these costs. costs to special orders. DIRECT COSTS VS. INDIRECT COSTS BREELAND LTD. SPECIAL ORDER Direct costs are those costs that are easily and conveniently The Cost Estimate. Abby has received a request from Breeland assigned to a special order. Major direct costs for Abby Ltd. to produce a unique, somewhat unstable cleaning solvent are direct materials and direct labor. Direct materials are for use in Breeland's specialized steel plating process. Ace those materials that become an integral part of the finished Fertilizer is one of only a handful of companies across the product. Direct labor, sometimes referred to as "touch country capable of producing such a solvent. The customer labor," includes the cost of those laborers who directly has a limited need for this solvent, and does not foresee touch the product while it is being made. The wages of requiring quantities of it beyond this special order. To produce general production employees who are idled due to machine this substance, Abby must purchase a specialty acid ingredient breakdown are classified as indirect costs. known as XO-1600. That substance is only available in Direct costs are usually variable and change as production 50-gallon drums. The 50-gallon drum costs $80,000. This volumes change. Thus, direct materials and direct labor are special order will only require the use of 40 gallons. XO-1600 typically variable costs. For special orders, some direct costs has a shelf life of only 20 days after the drum is opened. After can be fixed, however. The costs (depreciation, electricity, and those 20 days, the substance becomes very unstable and must routine maintenance) associated with a machine dedicated to be discarded. Because of the chemical nature of the substance, one product are direct costs of that product. it requires proper disposal. Abby estimates the cost of this Indirect costs cannot be easily and conveniently assigned disposal at $10,000. Abby has checked existing, confirmed Required Questions . 29F 8:44 PM Clear Q Search 2/4/2023 22MInbox (2,403) - septicia9@gmail.c x e Home - Montclair State University X M5: Case - Ace Fertilizer Compan x + V O X montclair.instructure.com/courses/167546/assignments/1546108?module_item_id=2950930 IS : M Gmail YouTube Maps M5-Ace_fertiziler.pdf & Download A Alternative formats 1 Info X Close Page 2 > of 5 O ZOOM + Indirect costs cannot be easily and conveniently assigned disposal at $10,000. Abby has checked existing, confirmed to a special order. Rather, these costs are common costs, in orders and found none that will require XO-1600 within the that they are incurred to produce a variety of special orders. next 20 days. Inquiries with representatives at Breeland Ltd. Maintenance costs of general purpose equipment, the reveal that they have no interest in taking possession of the supervisor's salary, and utilities are direct costs needed to unused gallons. produce special orders in general, but are indirect costs for a Abby also determines that several other costs and particular special order. Moreover, general production costs, activities will be associated with the completion of the including property taxes, insurance, lawn care, cafeteria special order for the solvent. These costs and activities are: costs, and miscellaneous supplies consumed in production 1. Direct materials, in addition to XO-1600: $20,000. are indirect costs properly allocated to special orders 2. Direct labor: $30,000. manufactured. 3. Unit measure of special order: 4,000 gallons. ALLOCATION OF INDIRECT COSTS 4. Number of batches for production: 4 (due to constraints during the mixing process). Abby could allocate indirect costs to special orders using a company-wide overhead rate. Frequently, these indirect costs Using ABC at the beginning of the costing period, Abby are allocated by selecting an allocation base common to all of the arrives at the following costs for each of the five activity measures: company's products or services. Many companies base overhead a. Unit-level activities: $40 per unit of measure. allocations on direct labor-hours or machine-hours. Abby realizes, b. Batch-level activities: $5,000 per batch. however, that this allocation process is troublesome as it is c. Product-level activities: $80,000 per project. impractical to trace these costs to specific orders. d. Customer-related activities: $30,000 per customer. Alternatively, Abby could allocate indirect costs to special e. Organization-sustaining activities: 100% of direct orders using activity-based costing (ABC). Rather than materials, direct labor, unit-level activity costs, and simply allocating indirect costs among special orders using a batch-level activity costs. company-wide rate, ABC acknowledges that not all costs are driven by output volume. As a result, information is available IMA EDUCATIONAL CASE JOURNAL 2 VOL. 2, NO. 3, ART. 3, SEPTEMBER 2009 Required Questions. 29F 8:44 PM Clear Search 2/4/2023 22MInbox (2,403) - septicia9@gmail.c x e Home - Montclair State University X M5: Case - Ace Fertilizer Compan x + V O X montclair.instructure.com/courses/167546/assignments/1546108?module_item_id=2950930 IS : M Gmail YouTube Maps M5-Ace_fertiziler.pdf & Download A Alternative formats 1 Info X Close Page 3 of 5 O ZOOM + Toward the end of the day on Friday, Abby works up Josh briefly walks away from the group, calls his customer, the following cost estimate and price determination for this and confirms the order. Smiling, Josh informs George of the special order: news. The two agree to finalize this arrangement later in the coming week. Direct materials: Josh's Project Price Determination. Early Monday morning, Non-XO-1600 $ 20,000 George goes to Abby's office to inform her of the development XO-1600: Purchase cost 80,00 with Josh over the weekend. He explains Josh's intent to Disposal cost 10,000 purchase the remaining 10 gallons of XO-1600. George Direct labor 30,000 indicates that the details of that agreement are to be finalized Unit-level activity cost ($40 * 4,000 gallons) 160,000 later in the week. Pausing for a moment to fully understand Batch-level activity cost ($5,000 * 4 batches) 20,000 the details of this arrangement, Abby remembers and informs Product-level activity cost 80,000 George that the price quote last Friday assumed that the extra Customer-level activity cost 30,000 10 gallons would remain unused and would require disposal, Organization-sustaining level activity cost and accordingly the order included the entire cost of the XO- (20,000+80,000+10,000+30,000+160,000+20,000 320,000 1600 plus the mandated disposal costs. Abby suggests that Breeland Ltd. be informed of a slight delay in the price quote Total costs of Breeland Ltd. special order $ 750,000 and if Breeland agrees to the delay, then the initial order can Markup on cost ($750,000/.80) 900,000 be revised in light of Josh's forthcoming order. To Abby's surprise, George is very cold to the idea of Total Price Determination for Breeland Ltd. Order $1.650,000 delaying the initial order. George contends that as of today, there are no confirmed orders that would require the extra 10 gallons of XO-1600. In fact, there will be no confirmed Abby discusses this estimate and price quote with George orders until later this week, when Josh meets with George Smilee, who expresses preliminary approval. Abby fully to finalize the weekend arrangement. Consequently, George Required Questions. 29F 8:44 PM Clear Q Search 2/4/2023 22