Ericson Ice cream Atkinson case
NOVA School of Business and Economics
Introduction
The present paper serves to exhibit the group’s analysis on the case “Ericson Ice Cream Company”. This case presents a situation where a company faces a problem that could be solved through a more accurate management accounting.
Case Analysis
Ericson Ice Cream Company was a successful ice cream producer which had seen its profit increasingly growing in the past years. As a consequence if its success, it decided to increase its products’ portfolio and started producing two additional flavours which could be charged at a higher price and, therefore, originated higher profits. However, after the introduction of these two new flavours, the company’s operating margins decreased. The company’s controller, Laura Tunney, could not understand the reason for this result as, according to her analysis, the two new products were more profitable than the others the company was already producing. At the same time, Ericson’s manufacturing manager, Jeffrey Donald, emphasized the fact that the production of the new products consist of a more complex process as it requires more time in setting up machines and monitoring the whole procedure. Consequently, he thought that increasing the company’s product portfolio would not benefit the company.
After some consideration, Laura Tunney arrived to the conclusion that probably her analysis was incorrect due to an inaccurate allocation of the company’s indirect costs. She had chosen to use the same method the company applied before and allocated the total amount of the indirect expenses on the basis of each product’s labour cost. In this sense, she calculated the percentage of the total amount of direct costs that each product consumed so she could then assign the total amount of the indirect expenses according to that percentage. Hence, she used a traditional costing system. However, the more complex process which the company has now to engage made the total amount of indirect
Introduction
The present paper serves to exhibit the group’s analysis on the case “Ericson Ice Cream Company”. This case presents a situation where a company faces a problem that could be solved through a more accurate management accounting.
Case Analysis
Ericson Ice Cream Company was a successful ice cream producer which had seen its profit increasingly growing in the past years. As a consequence if its success, it decided to increase its products’ portfolio and started producing two additional flavours which could be charged at a higher price and, therefore, originated higher profits. However, after the introduction of these two new flavours, the company’s operating margins decreased. The company’s controller, Laura Tunney, could not understand the reason for this result as, according to her analysis, the two new products were more profitable than the others the company was already producing. At the same time, Ericson’s manufacturing manager, Jeffrey Donald, emphasized the fact that the production of the new products consist of a more complex process as it requires more time in setting up machines and monitoring the whole procedure. Consequently, he thought that increasing the company’s product portfolio would not benefit the company.
After some consideration, Laura Tunney arrived to the conclusion that probably her analysis was incorrect due to an inaccurate allocation of the company’s indirect costs. She had chosen to use the same method the company applied before and allocated the total amount of the indirect expenses on the basis of each product’s labour cost. In this sense, she calculated the percentage of the total amount of direct costs that each product consumed so she could then assign the total amount of the indirect expenses according to that percentage. Hence, she used a traditional costing system. However, the more complex process which the company has now to engage made the total amount of indirect