Concentrate
Water
Sugar
Bottles
Flavor changeover
Conversion cost
Total cost transferred to finished goods
Number of cases
Orange Cola Lemon-Lime Root Beer
$ 4,625
1,250
3,000
5,500
3,000
1,750
$19,125
2,500
$129,000
30,000
72,000
132,000
4,800
24,000
$391,800
60,000
$ 105,000
25,000
60,000
110,000
4,000
20,000
$324,000
50,000
$ 7,600
2,000
4,800
8,800
10,000
2,800
$36,000
4,000
A
Beginning and ending work in process inventories are negligible, so are omitted from the cost of production report. The flavor changeover cost represents the cost of cleaning the bottling machines between production runs of different flavors.
Prepare a memo to the production manager, analyzing this comparative cost information. In your memo, provide recommendations for further action, along with supporting schedules showing the total cost per case and cost per case by cost element.
Answer:
Memo
To: Production Manager
The cost of production report is used to identify the cost per case for each of the
four flavors as shown below.
Orange Cola Lemon-Lime Root Beer
Total cost $19,125 $391,800 $324,000 $36,000
Number of cases ÷ 2,500 ÷ 60,000 ÷ 50,000 ÷ 4,000
Cost per case $ 7.65 $ 6.53 $ 6.48 $ 9.00
As can be seen, the cost per case of Root Beer is significantly above the cost
per case of the other three flavors. A more detailed analysis is necessary to
understand the causes of this difference. The individual cost elements that
determine the total cost can be divided by the number of cases. This analysis
is provided below.
Cost per Case by Cost Element
Orange Cola Lemon-Lime Root Beer
Concentrate $1.85 $2.15 $2.10 $1.90
Water 0.50 0.50 0.50 0.50
Sugar 1.20 1.20 1.20 1.20
Bottles 2.20 2.20 2.20 2.20
Flavor changeover 1.20 0.08 0.08 2.50
Conversion cost 0.70 0.40 0.40 0.70
Total cost per case $7.65 $6.53 $6.48 $9.00
The table above indicates that the concentrate per case is actually less for Orange and Root Beer than for Cola and Lemon-Lime. This is because the concentrate supplier charges a higher price for the more popular flavors. The costs per case for water, sugar, and bottles are the same for each flavor. However, the costs per case for changeover are much greater for Orange and Root Beer than for the other two flavors. In addition, the conversion costs per unit for Orange and Root Beer are $0.30 higher than for Cola and Lemon-Lime. These last two cost elements are sufficient to cause the cost per case of Orange and Root Beer to be greater than Cola and Lemon-Lime.
Although further analysis is necessary, it appears that Orange and Root Beer are either bottled in short production runs, meaning more frequent changeovers, or that each Orange and Root Beer changeover is very difficult and expensive. The conversion cost per case is larger because the bottling line rate appears slower for Orange and Root Beer, compared to Cola and Lemon-Lime. It’s possible that shorter run sizes are related to the slower line rate because it takes some run time to work the line rate up to a fast speed after a changeover. Root Beer costs more per case than Orange because it may have the shortest run length.