South Dakota Microbrewery Case Study
3. The advantage of determining cost using a plant-wide allocation based on direct-labor hours is that it is simple which means that it can be calculated with little time, and by extension, at low-cost. A more accurate method to determine cost is the activity-based cost system. Though more labor-intensive, and consequentially, more expensive, this system is more accurate, calculating the cost of individual activities using the most relevant cost driver. In the case of SDM there is value in looking at the more complex costing system, the activity-based system, because their overhead costs cover a varied list of cost types which have no single cost driver that can be used to accurately allocate their overhead expenses to their different product lines.
4. One of the primary problems that South Dakota Microbrewery (SDM) faces is that local competition in the ale market is driving the cost of ale down. Buffalo Ale is both SDM’s most profitable and biggest yielding product. Decreases in the price of ale wo uld adversely affect SDM’s bottom line. The company has some protection from this decrease in market price for ale because they have multiple product lines.
However one of their two other product lines, Bismark Bock, is not profitable and the company has a loss of $38.94 for each batch of bock that they sell. These losses were originally masked when SDM calculated their costs using a plant-wide allocation based on direct-labor hours.
If they cannot make a profit from bock, either by reducing the cost to produce it, or by increasing the price at which it is sold, this product line may need to be eliminated. However, without knowing more about the market that they operate in this may cause further losses and might need to be avoided. The most straight forward way to make bock profitable would be to increase its cost, but It is unclear in this case study if SDM will be able to adjust their pricing for bock without losing buyers, so this may not be a viable option.
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4. One of the primary problems that South Dakota Microbrewery (SDM) faces is that local competition in the ale market is driving the cost of ale down. Buffalo Ale is both SDM’s most profitable and biggest yielding product. Decreases in the price of ale wo uld adversely affect SDM’s bottom line. The company has some protection from this decrease in market price for ale because they have multiple product lines.
However one of their two other product lines, Bismark Bock, is not profitable and the company has a loss of $38.94 for each batch of bock that they sell. These losses were originally masked when SDM calculated their costs using a plant-wide allocation based on direct-labor hours.
If they cannot make a profit from bock, either by reducing the cost to produce it, or by increasing the price at which it is sold, this product line may need to be eliminated. However, without knowing more about the market that they operate in this may cause further losses and might need to be avoided. The most straight forward way to make bock profitable would be to increase its cost, but It is unclear in this case study if SDM will be able to adjust their pricing for bock without losing buyers, so this may not be a viable option.
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