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.
Drinks makes four different kinds of sports drinks. Those drinks are as follows:
Each 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.
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.
recall from your Management Accounting class that product costs are comprised
You don’t 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
Since your primary area of focus is on the indirect costs you
compile the following report which further details your overhead charges:
Using 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.
As 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:
Upon 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.
talking with the Plant Manger you create the following usage data relative to
products and activities:
1. Based on all of the date provided, compute the cost
driver rates for each of the four activities.
2. 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.
3. 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.
4. 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
Port 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.
5. 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.
6. 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 capacity.
Clarification on format and data:
communication and professionalism are important. Defending your answer with data is important.
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
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
As 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
Grading is based on both accuracy (see rubric) and your
ability to communicate your answers professionally and clearly.
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.