Chapter 11, Problem 6TIF

Identifying product cost distortion

Peachtree Beverage Company manufactures soft drinks. Information about two products is as follows:

It is known that both products have the same direct materials and direct labor costs per case. Peachtree Beverage allocates factory overhead to products by using a single plant-wide factory overhead rate, based on direct labor cost. Additional information about the two products is as follows:

Jamaican Punch: Requires extensive process preparation and sterilization prior to processing. The ingredients are from Jamaica, requiring complex import controls. The formulation is complex, and it is thus difficult to maintain quality. Finally, the product is produced in small production run sizes.

King Kola: Requires minor process preparation and sterilization prior to processing. The ingredients are acquired locally. The formulation is simple, and it is easy to maintain quality. Finally, the product is produced in large production run sizes.

Explain the weakness in the per-case product profitability report in light of the additional data.