Option #2: Applying Activity Based Costing #5-8.

Option #2: Applying Activity-Based Costing South of the Border's frozen food division will be changing its product line to include two product offerings, a bean and cheese empanada and a shredded beef and cheese empanada. The empanadas are formed through a molding operation in which a flour tortilla is inserted into a heated mold, one of the two pre- made purchased fillings is inserted through a small hole in the mold into the shell of the tortilla, item is deep fried, cooled to room temperature, and then the finished product is removed from the mold and packaged for frozen storage and bulk palletized shipment. Below is information regarding the direct costs and volumes of the two major products: Variable Cost and Volume Data Bean & Cheese Shredded Beef Raw materials $0.40 $0.75 Direct Labor $0.30 $0.45 Selling and General $0.05 $0.05 Volume in units 300,000 200,000 Sales prices of the two products are $1.95 for the bean and cheese empanada and $2.99 for the shredded beef empanada. The number of hours required to manufacture each unit was the same for both products. After interviewing the Factory and Production personnel, the division controller, Karen Solomon, prepared the following data table. From its simple cost structure, the company decided to reconsider its overhead pool and reallocate based on activity-based costing. Its simple overhead pool has been reclassified according to the ABC hierarchy within the following table: Indirect Factory Depreciation Repairs & Selling mktg, General & manufact. Insurance & machinery & maint. & distrib. admin. ABC Cost Pools labor utilities factory factory expenses expenses Product development 5,700 Setup shell molding equip. 3,000 11,900 Setup filling equipment 4,250 7,500 Setup frying equipment 1,200 1,200 Equipment operations 10,000 28,100 18,600 10,000 Shipment preparation 14,000 Distribution 5,100 Administration 11,000 60,000 Totals 24,150 28,100 39,200 15,100 25,000 60,000 Soloman also noted the following percentage allocations of cost for the activities that are required to manufacture each product. ABC Cost Allocation Percentages Bean and Cheese Shredded Beef Product development 2096 8096 Setup shell molding equipment 6096 4096 Setup filling equipment 50% 50% Setup frying equipment 5096 5096 Equipment operations 75% Shipment preparation 70% Distribution 65% Administration 50% 5096 From the cost information provided, provide responses in Microsoft Excel to the following questions. For assistance with Microsoft Excel, please refer to Lynda.com in the CSU-Global Library or use the Excel Tutorials link found in the classroom for tutorials. 1. Compute the cost of each product under the simple/traditional costing method. For period costs, use the same basis of allocation as factory overhead. 2. Compute the net operating profit margin of each product using the simple/traditional costing method. 3. Categorize the production activities under activity based costing according to the cost hierarchy. Indicate the type of cost category, which aligns with the activity. 4. Compute the total overhead and period cost allocation under ABC assumptions for each product. 5. Compute the per unit ABC cost of each product. 6. Compute the net profit margin of each product using the ABC costing method. 7. Compare the net profit margin of the products under the simple/traditional cost assignment and the ABC assignment for each product. Evaluate the difference. 8. On a separate Excel workbook tab, write a brief explanation (approximately two paragraphs) that Soloman might deliver to management to justify the use of ABC for these two products