2. Compute the per unit product costs for each of the four products. Compute this cost using ABC all

2. Compute the per unit product costs for each of the four products. Compute this cost using ABC allocation for overhead. Show the computation for each per unit product cost in detail.ACCT640 – Managerial AccountingFall 2013Case #2 – Performance Drinks: Applying Activity Based CostingWritten by:Tim Bergsma, CMA, CFEAssistant Professor – AccountingDavenport UniversityDonald W. Maine – College of BusinessEmail: tbergsma@davenport.edu1Background:Performance Drinks, LLC is owned by Dave N. Port. Performance Drinks produces avariety of sports centered drinks. They began operations in 1993 shortly after Mr. Port graduatedwith his M.B.A. from Davenport University. The company saw early success as sports andfitness nutritional products gained new popularity in the 1990’s. Financially the company issound and has been wise in controlling their growth over the years. However, within the last 18months Mr. Port has noticed a drop in overall company profitability. This is especially troublingconsidering that the company has continued to experience top-line growth. Mr. Port and hismanagement team have been considering developing a new product line. However, those planshave been put on hold until they can figure out why their profits are shrinking.Performance Drinks makes four different kinds of sports drinks. Those drinks are asfollows:BasicHydrationIntensityPost-WorkoutEach of these drinks contains a slightly different nutritional profile and is targeted fordifferent users and uses. The Basic drink has the least nutritional benefit and is targeted forgeneral consumption. The Hydration product targets endurance athletes and specializes inhydration replacement. The Intensity product was designed with energy enhancement in mind. Itserves the needs of extreme athletes who need long durations of sustained energy. Lastly, thePost-Workout product is a nutritional replacement product that is generally used followingexertion.2You are the Controller for Performance Drinks. You feel as though you have a goodhandle on the financial reporting and the overall company performance. However, admittedly,your accounting information system has been designed to serve the needs of external users froman aggregate perspective. To that end you utilize absorption costing exclusively within theorganization. You recall studying the concept of Activity Based Management (ABM) andActivity Based Costing (ABC) while taking a managerial accounting course. You wonder ifapplying those ideas to your business would help to uncover the mystery of the disappearingprofits.You recall from your Management Accounting class that product costs are comprised of:Direct MaterialsDirect LaborManufacturing OverheadYou don’t suspect that anything strange is going with your direct costs. You do wonder,however, if a more thorough understanding of your indirect costs may be in order. Over a seriesof weeks you talk with a variety of employees, representing a multitude of functional areas, fromwithin the company. During those conversations you take careful note on what activities mightbe consuming resources and how those activities might be measured. You sharpen your penciland begin to unpack what you’ve learned. You start with reviewing last month’s Product-LevelProfit Report. That report is following:3Since your primary area of focus is on the indirect costs you compile the following reportwhich further details your overhead charges:Overhead Activities:Using traditional costing methods, which support your absorption costing system, youbase overhead allocation on direct labor cost. Furthermore, “fringe benefits†are a function ofdirect labor cost.As a result of your many meetings to discuss company overhead you determine that themajority of your indirect costs are related to four primary activities. Those activities areequipment set-ups, production runs, production management and machine-hour capacity.“Production Management†refers to a number of items that are correlated to the number of4products the company produces. Ultimately you determine that your key activities have thefollowing usage patterns, as they pertain to the monthly overhead costs:Upon reviewing budget data from the last budget cycle you discover that the monthlynumber of set-ups was estimated to be 85. The number of production runs was estimated to be250. That monthly machine-hour capacity is presently at 20,000 machine-hours. Lastly,Performance Drinks produces a total of four products.After talking with the Plant Manger you create the following usage data relative toproducts and activities:Requirements:1. Based on all of the date provided, compute the cost driver rates for each of the fouractivities.2. Compute the per unit product costs for each of the four products. Compute this cost usingABC allocation for overhead. Show the computation for each per unit product cost indetail.3. Prepare a “Monthly Profit Reportâ€, like the one provided on page 4 of this packet. Createthis report using the results of your ABC overhead allocation.4. Prepare a written “Management Report†that explains to the management team whatActivity Based Costing is, how it was used to generate the Monthly Profit Report (from5requirement #3). Explain why the profit for each product is different when comparing theTraditional report with the ABC report. Explain what the company might consider doing,based on all of this information, to stop the erosion of company profits. Defend yourrecommendations with data.Additional Consideration:Mr. Port wonders what would happen to costs if plant capacity was shifted from 20,000machine-hours a month to 40,000 machine-hours per month.Requirements:5. Compute the new cost per unit for each of the products considering the increase incapacity. Show the computation for each per unit product cost in detail.6. What is the cost of the unused capacity if it is assumed that the company has 40,000machine-hours of capacity but it using 20,000 machine-hours? Amend your“Management Report†to include a discussion on how to best use the additional capacity.Clarification on format and data:Clear communication and professionalism are important. Defending your answer withdata is important.An electronic copy of this Case (this document) is available within Blackboard.Additionally, an Excel file, containing the basic data for the case will be available withinBlackboard.You will create one professional report. In that report you should clearly label all of youranswers. Make your answers easy to read and find. Imagine you were giving this reportto your boss. Further imagine you have to lead your boss and the executive team throughyour findings.6As it pertains to requirement #4, include the “Management Report†inside your overallreport. You will then have one Word document as your final product. You will also haveone Excel file.Grading is based on both accuracy (see rubric) and your ability to communicate youranswers professionally and clearly.Use the following naming structure for your files: last name_first initial_case2.docx. Ofcourse your Excel file will have an .xls suffix.Double space your report.Put good thought into how you organize your Excel document. Part of your grade will bebased upon the usability and layout of your Excel file. Imagine that have to give theelectronic copy of your Excel file to your boss, or a peer, to work with. Imagine that youcould not coach them at all on how to use your file. Is your file organized and labeled soclearly that anyone could use it, easily, without instructions from you? You want to strivefor that kind of clarity in your work.Your report should have a title page. Use APA 6th edition for guidance on title pages.You will physically hand-in your report. You will also upload to Blackboard both yourWord document and your Excel file.Due date: Tuesday, October 8th at 6:00 PM EDTLate submissions will result in the following: 10% reduction in score for each 24 hourperiod of being late (up to 3 days). After 3 days late zero credit will be earned.As always please come to me with learning questions. This project is a learningexperience.Rubric:This project is worth 20% (200 points) of your overall course grade. I will convert your scores toa 200 point scale.78