Question

Problem 10-69 (Algo) Assigning Capacity Costs: Seasonality (LO 10-6)

Mercia Chocolates produces gourmet chocolate products with no preservatives. Any production must be sold within a few days, so producing for inventory is not an option. Mercia’s single plant has the capacity to make 91,500 packages of chocolate annually. Currently, Mercia sells to only two customers: Vern’s Chocolates (a specialty candy store chain) and Mega Stores (a chain of department stores). Vern’s orders 48,300 packages and Mega Stores orders 16,500 packages annually. Variable manufacturing costs are $13 per package, and annual fixed manufacturing costs are $522,000.

The gourmet chocolate business has two seasons, holidays and non-holidays. The holiday season lasts exactly four months and the non-holiday season lasts eight months. Vern’s orders the same amount each month, so Vern’s orders 15,900 packages during the holidays and 32,400 packages in the non-holiday season. Mega Stores only carries Mercia’s chocolates during the holidays.

Required:

a. Calculate the product cost for each season with excess capacity costs assigned to season in which it is incurred.

b. Calculate the product cost for each season with excess capacity costs assigned to the season requiring it.

Answer 1

a. Calculate the product cost for each season with excess capacity costs assigned to season in which it is incurred.

Product cost =Variable manufacturing costs + Overhead rate

Excess capacity costs assigned to season in which it is incurred, then to products in that season. Thus,

holidays:

Overhead rate =($522,000*4/12 ÷ 15,900 packages) = $10.94 per package

Product cost =$ 13 + $10.94 = $23.94 per package

non-holidays:

Overhead rate = ($522,000*8/12 ÷ 48,300 packages) = $7.20 per package

Product cost =$13 + $7.20 = $20.20 per package

(b)Excess capacity costs assigned to the season requiring it, then to products produced in that season. Thus

holidays:

Overhead rate =($522,000*4/12 x 50% ÷ 15,900 packages) = $5.47 per package

Product cost =$ 13 + $5.47 = $18.47 per package

non-holidays:

Overhead rate = ($522,000*8/12 +($522,000*4/12 x 50%)÷ 48,300 packages) = $9.01 per package

Product cost =$13 + $9.01 = $22.01 per package