Crunch is King, Inc. operates at capacity and processes potatoesinto potato chips in a highly automated manufacturing facility. Thecompany sells chips to the retail consumer market and to theinstitutional market, which includes hospitals, cafeterias, anduniversities.
Crunch’s simple costing system, which does not distinguishbetween potato chips processed for retail and institutionalmarkets, has a single direct-cost category (direct materials, i.e.raw potatoes) and a single indirect-cost pool (production support).Support costs, which include packaging materials, are allocated onthe basis of pounds of potato chips processed. The company uses1,200,000 pounds of raw potatoes to process 1,000,000 pounds ofpotato chips. At the end of 2018, Crunch unsuccessfully bid for alarge institutional contract. Its bid was reported to be 30% abovethe winning bid. This feedback came as a shock because the companyincluded only a minimum profit margin on its bid and the plant wasacknowledged as the most efficient in the industry.
As a result of its review process of the lost contract bid,Crunch has decided to explore ways to refine its costing system.The company determined that 90% of the direct materials (rawpotatoes) related to the retail market and 10% to the institutionalmarket. In addition, the company identified that packagingmaterials could be directly traced to individual jobs ($180,000 forretail and $8,000 for institutional). Also, the company used ABC toidentify three main activity areas that generated support costs:cleaning, cutting and packaging. The following information relatesto the three areas identified:
Activity Area | Cost Allocation Base | Production |
Cleaning | pounds of raw potatoes | n/a |
Cutting | cutting hours | Retail 250 pounds/cutting hour Institutional 400 pounds/cutting hour |
Packaging | packaging hours | Retail 25 pounds/packaging hour Institutional 100 pounds/packaging hour |
Crunch (cont.)
The following table summarizes the actual cost for 2018 beforeand after the preceding cost analysis:
| before | after |
| | Production Support | Retail | Institutional | Total |
Direct materials used | | | | | |
Potatoes | $150,000 | | $135,000 | $15,000 | $150,000 |
Packaging | | | 180,000 | 8,000 | 188,000 |
Production Support | 983,000 | | | | |
Cleaning | | $120,000 | | | 120,000 |
Cutting | | 231,000 | | | 231,000 |
Packaging | | 444,000 | | | 444,000 |
Total | $1,133,000 | $795,000 | $315,000 | $23,000 | $1,133,000 |
- Using the simple costing system, what is the cost per pound ofpotato chips produced by Crunch?
- Calculate the cost rate per unit of the cost driver in theCleaning, Cutting, and Packaging activity areas.
- Suppose Crunch uses information from its activity cost rates tocalculate costs incurred on retail potato chips and institutionalpotato chips. Using the ABC system, what is the cost per pound ofretail potato chips and institutional potato chips?
- Comment on the cost differences between the two costing systemsin requirement 1 and 3. How might Crunch use the information inrequirement 3 to make better decisions?
