Presentation California Creamery Inc

Question 1:
Compute the full production cost (per gallon) of the Polynesian Fantasy and
Vanilla products using a) Will’s old costing method; b) The new costing method.

1



1a) Based on Will’s old costing method (Volume Based Costing):

•

California Creamery has a budgeted manufacturing overhead of
$600,000 and a budgeted direct labour cost of $300,000

•

Overhead rate per direct labour cost => $600,000/$300,000 = $2

From Exhibit 2 CALIFORNIA CREAMERY, INC.
Two Product Examples (2004 Data)
Polynesian
Fantasy
•

Direct labour

$1.20/gallon

Overhead assigned to:

Vanilla
$1.20/gallon



Polynesian Fantasy = $2 * $1.20 = $2.40 /gallon



Vanilla = $2 * $1.20 = $2.40 /gallon

1a) Based on Will’s old costing method (Volume Based Costing):
Polynesian
Fantasy

Vanilla

Unit product price
Direct material cost $2.00

$1.80

Direct labour cost $1.20

$1.20

Overhead
$2.40
$2.40
• Under Will’s old costing method, the full production cost of:
Fantasy
Cost per Polynesian unit $5.60
$5.40 Vanilla

$5.60 /gallon

$5.40/gallon

2

1b) Based on new costing method (Activity Based Costing):

3

Step 1: Calculate Activity Rate
From Exhibit 1 –
CALIFORNIA CREAMERY, INC.
2004 Budgeted Manufacturing Overhead Costs
(1)

(2)

(3)

(4)

(5) = (2)/(4)

Activity

Budgeted
Cost ($)

“Driver” of the
Activity’s Costs

Budgeted
Activity
Level

Activity Rate
($)

Purchasing

80,000

Purchase orders

909

80,000/909 = 88.009

Material handling 95,000

Setups

1,846

95,000/1,846 =
51.463

Blending

122,000

Blender hours

1,000

122,000/1,000 =
122.000

Freezing

175,000

Freezer hours

1,936

175,000/1,936 =
90.393

Packaging

110,000

Packaging machine hours 1,100

110,000/1,100 =
100.000

Quality control

18,000

Batches

286

18,000/286 = 62.937

1b) Based on new costing method (Activity Based Costing):

4

Step 2: Calculate the No. of Activities for each Cost Driver
From Exhibit 2 –

CALIFORNIA CREAMERY, INC.
Two Product Examples (2004 Data)
Polynesian
Fantasy

Polynesian