Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 56

Unused Capacity: The Grape Cola Caper

Refer to Integrative Case 9-48 in Chapter 9. Assume that all of the facts in Case 9-48 still hold except that the practical capacity of the machinery is 20,000 hours instead of 10,000 hours.

Required

a. Recompute the unit costs for each of the cola products: Diet, Regular, Cherry, and Grape.

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b. What is the cost of unused capacity? What do you recommend that Rockness Bottling do with this unused capacity?

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c. Now assume that Rockness is considering producing a fifth product: Vanilla cola. Because Vanilla cola is in high demand in Rockness Bottling’s market, assume that it would use 10,000 hours of machine time to make 100,000 units. (Recall that the machine capacity in this case is 20,000 hours, while Diet, Regular, Cherry, and Grape consume only 10,000 hours.) Vanilla cola’s per-unit costs would be identical to those of Diet cola except for the machine usage costs. What would be the cost of Vanilla cola? Calculate on a per-unit basis, and then in total.

Step 1 of 3

(Refer to the solution for 9-48.)

a.?Percentage utilization of resource by activities:

	Activity
	Setups	Production Runs	Products	Machine Time
Indirect labor (including fringe benefits)	50%	40%	10%	0%
Information technology (IT)	0	80	20	0
Machinery depreciation	0	0	0	100
Machinery maintenance	0	0	0	100
Energy	0	0	0	100

Costs assigned to activiities:

		Activity
	Cost	Setups	Production Runs	Products	Machine Time
Indirect labor	$28,000	$14,000	$11,200	$2,800	$        0
IT	10,000	0	8,000	2,000	0
Machinery depreciation	8,000	0	0	0	8,000
Machinery maintenance	4,000	0	0	0	4,000
Energy	2,000	0	0	0	2,000
Total	$52,000	$14,000	$19,200	$4,800	$14,000
÷ Activity		560 hours	110 runs	4 products	20,000 hrs
Cost driver rates		$25	$174.55	$1,200	$0.70

The only change is the cost driver rate for machine time:

Unit Costs on Cola Bottling Line
	Diet		Regular	Cherry	Grape	Total
Materials	$ 25,000		$ 20,000	$ 4,680	$     550	$   50,230
Direct labor	10,000		8,000	1,800	200	20,000
Fringe benefits on direct labor	4,000		3,200	720	80	8,000
Setup costs	5,000	a	1,500	6,000	1,500	14,000
Production run costs	6,982	b	5,236	5,236	1,746	19,200
Product costs	1,200	c	1,200	1,200	1,200	4,800
Machine costs	3,500	d	2,800	630	70	7,000
Total costs	$55,682		$41,936	$20,266	$ 5,346	$123,230
Volume	50,000		40,000	9,000	1,000
Cost per unit	$1.11		$1.05	$2.25	$5.35

a $5,000 = $25 per setup hour x 200 setup hours

b $6,928 = $174.55 per production run x 40 production runs

c $1,200 = $1,200 per product

d $3,500 = $0.70 per machine hour x 5,000 machine hours