Question

Crunch is King, Inc. operates at capacity and processes potatoes into potato chips in a highly automated manufacturing facility. The company sells chips to the retail consumer market and to the institutional market, which includes hospitals, cafeterias, and universities.

Crunch’s simple costing system, which does not distinguish between potato chips processed for retail and institutional markets, 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 on the basis of pounds of potato chips processed. The company uses 1,200,000 pounds of raw potatoes to process 1,000,000 pounds of potato chips. At the end of 2018, Crunch unsuccessfully bid for a large institutional contract. Its bid was reported to be 30% above the winning bid. This feedback came as a shock because the company included only a minimum profit margin on its bid and the plant was acknowledged 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 (raw potatoes) related to the retail market and 10% to the institutional market. In addition, the company identified that packaging materials could be directly traced to individual jobs ($180,000 for retail and $8,000 for institutional). Also, the company used ABC to identify three main activity areas that generated support costs: cleaning, cutting and packaging. The following information relates to 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 before and 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

1. Using the simple costing system, what is the cost per pound of potato chips produced by Crunch?

2. Calculate the cost rate per unit of the cost driver in the Cleaning, Cutting, and Packaging activity areas.

3. Suppose Crunch uses information from its activity cost rates to calculate costs incurred on retail potato chips and institutional potato chips. Using the ABC system, what is the cost per pound of retail potato chips and institutional potato chips?

4. Comment on the cost differences between the two costing systems in requirement 1 and 3. How might Crunch use the information in requirement 3 to make better decisions?

Answer 1