Howard Rockness was worried. His company, Rockness Bottling, showed declining profits over the past several years despite an increase in revenues. With profits declining and revenues increasing, Rockness knew there must be a problem with costs. Rockness sent an e-mail to his executive team under the subject heading, "How do we get Rockness Bottling back on track?" Meeting in Rockness's spacious office, the team began brainstorming solutions to the declining profits problem. Some members of the team wanted to add products. (These were marketing people.) Some wanted to fire the least efficient workers. (These were finance people.) Some wanted to empower the workers. (These people worked in the human resources department.) And some people wanted to install a new computer system. (It should be obvious who these people were.) Rockness listened patiently. When all participants had made their cases, Rockness said, "We made money when we were a smaller, simpler company. We have grown, added new product lines, and added new products to old product lines. Now we are going downhill. What's wrong with this picture?" Rockness continued, "Here, look at this report. This is last month's report on the cola bottling line. What do you see here?" He handed copies of the following report to the people assembled in his office. Monthly Report on Cola Bottling Line Diet $297,000 Regular $172,800 Cherry $57,750 Grape $19,950 Total Sales $547,500 Less: Materials Direct labor Fringe benefits on direct labor Indirect costs (@260% of direct labor) Gross margin Return on sales (see note [a]) Volume Unit price Unit cost 141,000 28,000 11, 200 72,800 $ 44,000 14.8% 91, 200 14,000 5,600 36,400 $ 25,600 31,920 4,200 1,680 10,920 $ 9,030 15.6% 21,000 $ 2.75 $ 2.32 13,250 800 320 2,080 $ 3,500 277,370 47,000 18,800 122,200 $ 82,130 110,000 2.70 14.8% 64, 000 2.70 17.5% 7,000 %24 15.0% 202,000 24 2.85 $4 24 2.71 2.30 2.30 2.35 2.30 Return on sales before considering selling, general and administrative expenses. Rockness asked, "Do you see any problems here? Should we drop any of these products? Should we reprice any of these products?" The room was silent for a moment, and then everybody started talking at once. Nobody could see any problems based on the data in the report, but they all made suggestions to Rockness ranging from “add another cola product" to "cut costs across the board" to "we need a new computer system so that managers can get this information more quickly." A not-so-patient Rockness stopped the discussion abruptly and adjourned the meeting. He then turned to the quietest person in the room-his son, Rocky-and said, “I am suspicious of these cost data, Rocky. Here we are assigning indirect costs to these products using a 260 percent rate. I really wonder whether that rate is accurate for all products. I want you to dig into the indirect cost data, figure out what drives those costs, and see whether you can give me more accurate cost numbers for these products." Rocky first learned from production that the process required four activities: (1) setting up production runs, (2) managing production runs, and (3) managing products. The fourth activity did not require labor; it was simply the operation of machinery. Next, he went to the accounting records to get a breakdown of indirect costs. Here is what he found:
Howard Rockness was worried. His company, Rockness Bottling, showed declining profits over the past several years despite an increase in revenues. With profits declining and revenues increasing, Rockness knew there must be a problem with costs. Rockness sent an e-mail to his executive team under the subject heading, "How do we get Rockness Bottling back on track?" Meeting in Rockness's spacious office, the team began brainstorming solutions to the declining profits problem. Some members of the team wanted to add products. (These were marketing people.) Some wanted to fire the least efficient workers. (These were finance people.) Some wanted to empower the workers. (These people worked in the human resources department.) And some people wanted to install a new computer system. (It should be obvious who these people were.) Rockness listened patiently. When all participants had made their cases, Rockness said, "We made money when we were a smaller, simpler company. We have grown, added new product lines, and added new products to old product lines. Now we are going downhill. What's wrong with this picture?" Rockness continued, "Here, look at this report. This is last month's report on the cola bottling line. What do you see here?" He handed copies of the following report to the people assembled in his office. Monthly Report on Cola Bottling Line Diet $297,000 Regular $172,800 Cherry $57,750 Grape $19,950 Total Sales $547,500 Less: Materials Direct labor Fringe benefits on direct labor Indirect costs (@260% of direct labor) Gross margin Return on sales (see note [a]) Volume Unit price Unit cost 141,000 28,000 11, 200 72,800 $ 44,000 14.8% 91, 200 14,000 5,600 36,400 $ 25,600 31,920 4,200 1,680 10,920 $ 9,030 15.6% 21,000 $ 2.75 $ 2.32 13,250 800 320 2,080 $ 3,500 277,370 47,000 18,800 122,200 $ 82,130 110,000 2.70 14.8% 64, 000 2.70 17.5% 7,000 %24 15.0% 202,000 24 2.85 $4 24 2.71 2.30 2.30 2.35 2.30 Return on sales before considering selling, general and administrative expenses. Rockness asked, "Do you see any problems here? Should we drop any of these products? Should we reprice any of these products?" The room was silent for a moment, and then everybody started talking at once. Nobody could see any problems based on the data in the report, but they all made suggestions to Rockness ranging from “add another cola product" to "cut costs across the board" to "we need a new computer system so that managers can get this information more quickly." A not-so-patient Rockness stopped the discussion abruptly and adjourned the meeting. He then turned to the quietest person in the room-his son, Rocky-and said, “I am suspicious of these cost data, Rocky. Here we are assigning indirect costs to these products using a 260 percent rate. I really wonder whether that rate is accurate for all products. I want you to dig into the indirect cost data, figure out what drives those costs, and see whether you can give me more accurate cost numbers for these products." Rocky first learned from production that the process required four activities: (1) setting up production runs, (2) managing production runs, and (3) managing products. The fourth activity did not require labor; it was simply the operation of machinery. Next, he went to the accounting records to get a breakdown of indirect costs. Here is what he found:
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Concept explainers
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Topic Video
Question
PLEASE SEE ATTACHED, please answer all questions.
Required:
a. Recompute the unit costs for each of the cola products: Diet, Regular, Cherry, and Grape.
b. What is the cost of unused capacity?
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 20,200 hours of machine time to make 202,000 units. (Recall that the machine capacity in this case is 40,400 hours, while Diet, Regular, Cherry, and Grape consume only 20,200 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.
Transcribed Image Text:$ 47,000
Indirect labor
Fringe benefits on indirect labor
Information technology
Machinery depreciation
Machinery maintenance
18,800
32,800
14,000
6,400
3,200
Energy
Total
$122,200
Then, he began a series of interviews with department heads to see how to assign these costs to cost pools. He found that 40 percent
of indirect labor was for scheduling or for handling production runs, including purchasing, preparing the production run, releasing
materials for the production run, and performing a first-time inspection of the run. Another 50 percent of indirect labor was used to set
up machinery to produce a particular product. The remaining 10 percent of indirect labor was spent maintaining records for each of the
four products, monitoring the supply of raw materials required for each product, and improving the production processes for each
product. This 10 percent of indirect labor was assigned to the cost driver “number of products."
Interviews with people in the information technology department indicated that $32,800 was allocated to the cola bottling line. 80
percent of this $32,800 information technology cost was for scheduling production runs. 20 percent of the cost was for record
keeping for each of the four products.
Fringe benefits were 40 percent of labor costs. The rest of the overhead was used to supply machine capacity of 40,400 hours of
productive time.
Rocky then found the following cost driver volumes from interviews with production personnel.
• Setups: 920 labor-hours for setups.
Production runs: 410 production runs.
Number of products: 4 products.
• Machine-hour capacity: 40,400 hours.
Diet cola used 320 setup hours, 160 production runs, and 11,000 machine-hours to produce 110,000 units. Regular cola used 120 setup
hours, 90 production runs, and 6,400 machine-hours to produce 64,000 units. Cherry cola used 360 setup hours, 90 production runs,
and 2,100 machine-hours to produce 21,000 units. Grape cola used 120 setup hours, 70 production runs,and 700 machine-hours to
produce 7,000 units. Rocky learned that the production people had a difficult time getting the taste just right for the Cherry and Grape
colas, so these products required more time per setup than either the Diet or Regular colas.
Required:
a. Recompute the unit costs for each of the cola products: Diet, Regular, Cherry, and Grape.
b. What is the cost of unused capacity?
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 20,200 hours of machine time to make 202,000 units. (Recall that the machine
capacity in this case is 40,400 hours, while Diet, Regular, Cherry, and Grape consume only 20,200 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
![Howard Rockness was worried. His company, Rockness Bottling, showed declining profits over the past several years despite an
increase in revenues. With profits declining and revenues increasing, Rockness knew there must be a problem with costs.
Rockness sent an e-mail to his executive team under the subject heading, “How do we get Rockness Bottling back on track?" Meeting
in Rockness's spacious office, the team began brainstorming solutions to the declining profits problem. Some members of the team
wanted to add products. (These were marketing people.) Some wanted to fire the least efficient workers. (These were finance people.)
Some wanted to empower the workers. (These people worked in the human resources department.) And some people wanted to
install a new computer system. (It should be obvious who these people were.)
Rockness listened patiently. When all participants had made their cases, Rockness said, "We made money when we were a smaller,
simpler company. We have grown, added new product lines, and added new products to old product lines. Now we are going
downhill. What's wrong with this picture?"
Rockness continued, "Here, look at this report. This is last month's report on the cola bottling line. What do you see here?" He handed
copies of the following report to the people assembled in his office.
Monthly Report on Cola Bottling Line
Diet
$297,000
Regular
$172, 800
Cherry
$57,750
Total
Grape
$19,950
Sales
$547,500
Less:
91, 200
14,000
5,600
36,400
$ 25,600
14.8%
64, 000
31,920
4,200
1,680
Materials
141,000
28,000
11, 200
13,250
277,370
Direct labor
800
47,000
Fringe benefits on direct labor
Indirect costs (@260% of direct labor)
Gross margin
Return on sales (see note [a])
Volume
320
18,800
72,800
$ 44, 000
10,920
$ 9,030
15.6%
2,080
$ 3,500
122, 200
$ 82,130
14.8%
110,000
$4
17.5%
15.0%
Unit price
Unit cost
21,000
$ 2.75
7,000
$ 2.85
202,000
%24
$4
2.70
2.70
2.71
2.30
2$
2.30
$4
2.32
$4
2.35
2.30
a Return on sales before considering selling, general and administrative expenses.
Rockness asked, "Do you see any problems here? Should we drop any of these products? Should we reprice any of these products?"
The room was silent for a moment, and then everybody started talking at once. Nobody could see any problems based on the data in
the report, but they all made suggestions to Rockness ranging from "add another cola product" to "cut costs across the board" to "we
need a new computer system so that managers can get this information more quickly." A not-so-patient Rockness stopped the
discussion abruptly and adjourned the meeting.
He then turned to the quietest person in the room-his son, Rocky-and said, "I am suspicious of these cost data, Rocky. Here we are
assigning indirect costs to these products using a 260 percent rate. I really wonder whether that rate is accurate for all products. I want
you to dig into the indirect cost data, figure out what drives those costs, and see whether you can give me more accurate cost
numbers for these products."
Rocky first learned from production that the process required four activities: (1) setting up production runs, (2) managing production
runs, and (3) managing products. The fourth activity did not require labor; it was simply the operation of machinery. Next, he went to
the accounting records to get a breakdown of indirect costs. Here is what he found:](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F61ae5430-25ae-4fd0-9dbe-872050663ccf%2F5fc7ec7b-d062-447a-aa05-a75bc4bd06b7%2Fk450vv_processed.png&w=3840&q=75)
Transcribed Image Text:Howard Rockness was worried. His company, Rockness Bottling, showed declining profits over the past several years despite an
increase in revenues. With profits declining and revenues increasing, Rockness knew there must be a problem with costs.
Rockness sent an e-mail to his executive team under the subject heading, “How do we get Rockness Bottling back on track?" Meeting
in Rockness's spacious office, the team began brainstorming solutions to the declining profits problem. Some members of the team
wanted to add products. (These were marketing people.) Some wanted to fire the least efficient workers. (These were finance people.)
Some wanted to empower the workers. (These people worked in the human resources department.) And some people wanted to
install a new computer system. (It should be obvious who these people were.)
Rockness listened patiently. When all participants had made their cases, Rockness said, "We made money when we were a smaller,
simpler company. We have grown, added new product lines, and added new products to old product lines. Now we are going
downhill. What's wrong with this picture?"
Rockness continued, "Here, look at this report. This is last month's report on the cola bottling line. What do you see here?" He handed
copies of the following report to the people assembled in his office.
Monthly Report on Cola Bottling Line
Diet
$297,000
Regular
$172, 800
Cherry
$57,750
Total
Grape
$19,950
Sales
$547,500
Less:
91, 200
14,000
5,600
36,400
$ 25,600
14.8%
64, 000
31,920
4,200
1,680
Materials
141,000
28,000
11, 200
13,250
277,370
Direct labor
800
47,000
Fringe benefits on direct labor
Indirect costs (@260% of direct labor)
Gross margin
Return on sales (see note [a])
Volume
320
18,800
72,800
$ 44, 000
10,920
$ 9,030
15.6%
2,080
$ 3,500
122, 200
$ 82,130
14.8%
110,000
$4
17.5%
15.0%
Unit price
Unit cost
21,000
$ 2.75
7,000
$ 2.85
202,000
%24
$4
2.70
2.70
2.71
2.30
2$
2.30
$4
2.32
$4
2.35
2.30
a Return on sales before considering selling, general and administrative expenses.
Rockness asked, "Do you see any problems here? Should we drop any of these products? Should we reprice any of these products?"
The room was silent for a moment, and then everybody started talking at once. Nobody could see any problems based on the data in
the report, but they all made suggestions to Rockness ranging from "add another cola product" to "cut costs across the board" to "we
need a new computer system so that managers can get this information more quickly." A not-so-patient Rockness stopped the
discussion abruptly and adjourned the meeting.
He then turned to the quietest person in the room-his son, Rocky-and said, "I am suspicious of these cost data, Rocky. Here we are
assigning indirect costs to these products using a 260 percent rate. I really wonder whether that rate is accurate for all products. I want
you to dig into the indirect cost data, figure out what drives those costs, and see whether you can give me more accurate cost
numbers for these products."
Rocky first learned from production that the process required four activities: (1) setting up production runs, (2) managing production
runs, and (3) managing products. The fourth activity did not require labor; it was simply the operation of machinery. Next, he went to
the accounting records to get a breakdown of indirect costs. Here is what he found:
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