– Managerial Accounting
#2 – Performance Drinks: Applying Activity Based Costing
Performance Drinks, LLC is owned by
Dave N. Port. Performance Drinks
produces a variety of sports centered drinks.
They began operations in 1993 shortly after Mr. Port graduated with his
M.B.A. from Davenport University. The
company saw early success as sports and fitness nutritional products gained new
popularity in the 1990’s. Financially
the company is sound and has been wise in controlling their growth over the
years. However, within the last 18
months Mr. Port has noticed a drop in overall company profitability. This is especially troubling considering that
the company has continued to experience top-line growth. Mr. Port and his management team have been
considering developing a new product line.
However, those plans have been put on hold until they can figure out why
their profits are shrinking.
Performance Drinks makes four
different kinds of sports drinks. Those
drinks are as follows:
of these drinks contains a slightly different nutritional profile and is
targeted for different users and uses.
The Basic drink has the least nutritional benefit and is targeted for
general consumption. The Hydration
product targets endurance athletes and specializes in hydration
replacement. The Intensity product was
designed with energy enhancement in mind. It serves the needs of extreme
athletes who need long durations of sustained energy. Lastly, the Post-Workout product is a
nutritional replacement product that is generally used following exertion.
You are the Controller for
Performance Drinks. You feel as though
you have a good handle on the financial reporting and the overall company
performance. However, admittedly, your
accounting information system has been designed to serve the needs of external
users from an aggregate perspective. To
that end you utilize absorption costing exclusively within the
organization. You recall studying the
concept of Activity Based Management (ABM) and Activity Based Costing (ABC)
while taking a managerial accounting course.
You wonder if applying those ideas to your business would help to
uncover the mystery of the disappearing profits.
You recall from your Management
Accounting class that product costs are comprised of:
suspect that anything strange is going with your direct costs. You do wonder, however, if a more thorough
understanding of your indirect costs may be in order. Over a series of weeks you talk with a
variety of employees, representing a multitude of functional areas, from within
the company. During those conversations
you take careful note on what activities might be consuming resources and how
those activities might be measured. You
sharpen your pencil and begin to unpack what you’ve learned. You start with reviewing last month’s Product-Level
Profit Report. That report is following:
Since your primary area of focus is
on the indirect costs you compile the following report which further details
your overhead charges:
traditional costing methods, which support your absorption costing system, you
base overhead allocation on direct labor cost.
Furthermore, “fringe benefits” are a function of direct labor cost.
a result of your many meetings to discuss company overhead you determine that
the majority of your indirect costs are related to four primary
activities. Those activities are
equipment set-ups, production runs, production management and machine-hour
capacity. “Production Management” refers
to a number of items that are correlated to the number of products the company
produces. Ultimately you determine that
your key activities have the following usage patterns, as they pertain to the
monthly overhead costs:
reviewing budget data from the last budget cycle you discover that the monthly
number of set-ups was estimated to be 85.
The number of production runs was estimated to be 250. That monthly machine-hour capacity is
presently at 20,000 machine-hours.
Lastly, Performance Drinks produces a total of four products.
After talking with the Plant Manger
you create the following usage data relative to products and activities:
Based on all of the date provided,
compute the cost driver rates for each of the four activities.
Compute the per unit product costs for
each of the four products. Compute this cost using ABC allocation for
overhead. Show the computation for each
per unit product cost in detail.
Prepare a “Monthly Profit Report”, like
the one provided on page 4 of this packet.
Create this report using the results of your ABC overhead allocation.
Prepare a written “Management Report”
that explains to the management team what Activity Based Costing is, how it was
used to generate the Monthly Profit Report (from requirement #3). Explain why the profit for each product is
different when comparing the Traditional report with the ABC report. Explain what the company might consider
doing, based on all of this information, to stop the erosion of company
profits. Defend your recommendations
wonders what would happen to costs if plant capacity was shifted from 20,000
machine-hours a month to 40,000 machine-hours per month.
Compute the new cost per unit for each
of the products considering the increase in capacity. Show the computation for each per unit
product cost in detail.
What is the cost of the unused capacity
if it is assumed that the company has 40,000 machine-hours of capacity but it
using 20,000 machine-hours? Amend your
“Management Report” to include a discussion on how to best use the additional
on format and data:
communication and professionalism are important. Defending your answer with data is
An electronic copy of this Case (this
document) is available within Blackboard.
Additionally, an Excel file, containing the basic data for the case will
be available within Blackboard.
You will create one professional
report. In that report you should
clearly label all of your answers. Make
your answers easy to read and find.
Imagine you were giving this report to your boss. Further imagine you have to lead your boss
and the executive team through your findings.
it pertains to requirement #4, include the “Management Report” inside your
overall report. You will then have one
Word document as your final product. You will also have one Excel file.
Grading is based on both accuracy (see
rubric) and your ability to communicate your answers professionally and
Use the following naming structure for
your files: last name_first initial_case2.docx.
Of course your Excel file will have an .xls suffix.
Double space your report.
Put good thought into how you organize
your Excel document. Part of your grade will be based upon the usability and
layout of your Excel file. Imagine that have to give the electronic copy of
your Excel file to your boss, or a peer, to work with. Imagine that you could not coach them at all
on how to use your file. Is your file
organized and labeled so clearly that anyone could use it, easily, without
instructions from you? You want to
strive for that kind of clarity in your work.
Your report should have a title page.
Use APA 6th edition for guidance on title pages.
You will physically hand-in your report.
You will also upload to Blackboard both your Word document and your Excel file.
Due date: Tuesday, October 8th
at 6:00 PM EDT
Late submissions will result in the
following: 10% reduction in score for
each 24 hour period of being late (up to 3 days). After 3 days late zero credit will be earned.
As always please come to me with
learning questions. This project is a learning experience.
This project is
worth 20% (200 points) of your overall course grade. I will convert your scores
to a 200 point scale.