North Harbour Nurseries (NHN) is a commercial nursery that specialises in two core product lines. The largest volume sales are the Mixed Seedlings, which are sold as trays of 20 small seedlings to road construction companies for use in planting the sides of motorways and other large-scale roadworks. The company also supplies commercial landscapers with large Specimen Trees ready for planting. These trees are sold individually and are expensive to produce because of the time taken to grow the trees. In addition, the company also sells individual seedlings that do not meet quality standards. These Gate Sales are sold direct from the company's nursery in Albany and the plants are sold as is (i.e., they are not put in trays before sale). Currently, the company uses a traditional costing approach to allocate overheads, but the nursery owner is aware that this distorts the profits reported on each product line. Given the company is currently considering expanding their business, he realises the importance of getting the mix of product lines right and wants to revisit how overheads are allocated. The nursery supervisor has provided you with the following costing details for the last year. Under the current system the total nursery overheads for the year are allocated based on the total number of plants produced. Mixed Seedlings Specimen Trees Gate Sales 20 na 500 Number of plants per tray Annual number of plants produced Sales Price per plant Direct Materials per unit Direct labour per unit 500,000 $2 $0.40 $0.60 $600 $50 $100 20.000 $1.50 $0.40 $0.30 The supervisor has also collected information regarding the different activities carried out in the business. Gate Sales Mixed Seedlings 50% Specimen Trees 50% OX Activity Nursey Supervisor time Fertiliser applications per tray or tree Number of plants per tray Pruning per plant Quality inspection time per plant Land area required for planting (proportion of total available) 20 30 seconds 57% 10 minutes 40% 30 seconds 3% The break down of the overhead costs by activity is shown below: Overhead Cost Overhead cost Nursery supervisor salary $65,000 Fertilisation $30,000 Trays $20,000 Tree pruning $25,000 Quality Inspections $40,000 Rent - land $300,000 Rent - office $30,000 Total Overheads $510,000 Taking the role of the management accountant: a) Calculate the gross profit and gross profit percentage for each product line for the year using traditional costing. Allocate overhead costs based on the total number of plants produced. You should also show the total revenue, costs and gross profit for the year (detail all costs on a line- by-line basis). b) Prepare an activity-based cost analysis for the year that details the gross profit and gross profit percentage for each product line. Show all the costs for each product line and split costs into unit, batch, product and facility level costs. You will need to decide the appropriate activity driver for each of the overhead costs using the information you have been provided. You should also show the total revenue, costs and gross profit for the year (detail all costs on a line- by-line basis)
