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

Exercise 50

Assigning Capacity Costs

Cathy and Tom’s Specialty Ice Cream Company operates a small production facility for the local community. The facility has the capacity to make 18,000 gallons of the single flavor, GUI Chewy, annually. The plant has only two customers, Chuck’s Gas&Go and Marcee’s Drive&Chew Drive Thru. Annual orders for Chuck’s total 9,000 gallons and annual orders for Marcee’s total 4,500 gallons. Variable manufacturing costs are $1 per gallon, and annual fixed manufacturing costs are $27,000.

Required

What cost per gallon should the cost system report? Why? If you need more information to answer the question, describe it.

Step 1 of 4

Cost accounting system

This is a system designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager.