1. As Exhibit 1 shown, I first calculate the predetermined overhead rate, which is $15.57 per direct labor hour. And I distributed the dollar amount to different proportion based on Direct-Labor hours to get the overhead cost. Sum the overhead and direct cost to get the total cost; this will be the total cost of producing a batch of beer label. Therefore, we need to divide them up by the bottle per batch in order to know the cost per each bottle for each label. As shown in Exhibit 2, I have determined the allocation rate of each cost driver, and that will allow me to assign them to different cost pool; base on the activities. Adding up all the number I assigned, will give me the overhead cost for each label of a batch. Sum the number up with the direct cost as I did in Exhibit 1, in order to get the cost per batch and per bottle for each beer label. 2. To find gross margin for each batch, we need to know how much they earn by selling one single beer. Use the information from Exhibit 1 and 2; we can know the total cost of each bottle of label. Take away the cost from the selling price, and it will give us the gross margin of selling one beer. Multiply the number to the “number of bottle in a batch”, to get the gross margin for a batch. 3. The benefits of using Plant-wide allocation based method are that, it is simple and easy to calculate. It doesn’t give a really terrible result, it is totally usable with a smaller size companies with smaller amount of product lines. On the other hand, the advantages of using Activity-based cost system are that, it is much more accurate displaying costs. And it will work best with a larger scale of company and product lines. Also, during the process, managers will acquire more information than other method, which is always good to have more information. However, the drawback of using Plant-wide allocation based method are that, it is inaccurate in displaying costs, sometime that might cause the managers to make wrong decisions; because the result is actually different. On the other hand, the coats of using ABC system are that, it takes much more time to calculate, and more information is needed, otherwise it cannot be done. 4. The biggest problem SDM had was the wrong overhead cost method. That made them think Buffalo Ale’s performance is declining, and other labels are doing well. In fact, by using the ABC system, as results, both Buffalo Ale and FHS is doing really well. The biggest problem now is the Bismark Bock. Currently, Bismark Bock is losing $0.1 per each bottle sold, and that is $38.4 per batch sold. The main reason of this situation is that, Bismark Bock has too high production cost, twice as much as other two label. Further, trace back to the cost itself, the direct cost seems all right compare to other labels. The only problem I observed is that, Bismark Bock has a really high Machine Hours overhead cost. And I think that is the core reason of the situation. Since Bismark Bock needs more attention in order to obtain the flavored, the higher quality control is totally understandable. We need to cut the fermentation days and the quality control inspection to half. Even though this products need special care, but if it is a really good, and well-sale product, by selling as much, the company will lose as much. By cutting these two major costs sources, will bring down the cost of overhead. However, it might lose customers on that as well. Or on worst case scenario is to shut down the product. But cutting machine hours and number order to half, will not still make the product to break-even. Therefore, if the company want Bismark Bock to keep its taste, the might lose some money on each sales, or make worse beer and maintain profits. 5. It doesn’t really affect whole lots, only a by difference of 235 dollars. As Shown in Exhibit 5.
The plant-wide allocation based on Direct-Labor hours
Predetermined Overhead Rate
$116,7507500 =$15.57 per...