South Dakota Microbrewery Case Study
1. The total product and per bottle cost under allocation based on direct-labor hours for Buffalo Ale, Bismark Bock and Four Heads Stout is $450.86 and $0.85, $347.79 and $0.91 and $369.96 and $0.86, respectively. Under activity based costing the total product and per bottle cost for Buffalo Ale, Bismark Bock and Four Heads Stout is $317.58 and $0.60, $615.5 and $1.6 and $379.29 and $0.88, respectively. Calculations can be found in Appendix A.
2. The gross margin and gross margin percentage under allocation based on direct-labor hours for Buffalo Ale, Bismark Bock and Four Heads Stout is $103.54 and 19%, $228.21 and 40% and $234.84 and 39%, respectively. The gross margin and gross margin percentage under activity based costing for Buffalo Ale, Bismark Bock and Four Heads Stout is $236.82 and 43%, -$39.5 and -6.9% and $225.51 and 37%. Calculations can be found in Appendix B.
3. Both a plant-wide allocation system and activity based costing have their own unique advantages and disadvantages. Due to the simpler, less time consuming process, allocating based on direct-labor hours is much cheaper because the company does not have to pay someone to do the additional math required by the activity based costing method. However, activity based costing is more accurate because the costs incurred by South Dakota Microbrewery do not all share a singular cost driver and are better represented by allocating each cost to their own driver.
4. Overall, South Dakota Microbrewery is a strong company but they do face a few problems that could adversely affect their business in the future. The most obvious problem that SDM faces is the gross margin loss of $39.5 for every batch of Bismark Bock that is sold. Under the plant-wide allocation method, this loss was hidden but after allocating based on activity, this cost becomes a major problem for the company. Without a positive gross margin, the company...