3 Cathy and Tom\'s Specialty Ice Cream Company operates a small production facility for the local community. The facility has the capacity to make 25,500 gallons of the single flavor, GUI Chewy, annually. The plant has only two customers, Chuck\'s Gas & Go and Marcee\'s Drive& Chew DriveThru. Annual orders for Chuck\'s total 12,750 gallons and annual orders for Marcee\'s total 6,375 gallons. Variable manufacturing costs are $0.90 per gallon, and annual fixed manufacturing costs are $33,900 The ice cream business has two seasons, summer and winter. Each season lasts exactly six months. Chuck\'s orders 6,375 gallons in the summer and 6,375 gallons in the winter. Marcee\'s is closed in the winter and orders all 6,375 gallons in the summer Required: a. Calculate the product cost for each season with excess capacity costs assigned to season in which it is incurred. (Round your intermediate calculations and final answers to 2 decimal places.) Product Cost per gallon per gallon Winter Summer b. Calculate the product cost for each season with excess capacity costs assigned to the season requiring it. (Round your intermediate calculations and final answers to 2 decimal places.) Product Cost per gallorn per gallorn Winter Summer
With seasonal demand fluctuations, the reason for the excess capacity is for the benefit of the two customers (Cathy and Tom need all the capacity in the summer). The issue is how to treat the excess capacity costs. The capacity costs in each season are $16,950 (= $33,900 ÷ 2 seasons). Two approaches to costing are:
Part A
Excess capacity costs assigned to season in which it is incurred, then to products in that season. Thus,Winter:
Overhead rate =($16950 ÷ 6,375gallons) = $2.66/gallon
Product cost =$0.90 + $2.66 = $3.56/gallon
Summer:
Overhead rate = ($16,950 ÷ 12,750 gallons) = $1.33/gallon
Product cost =$0.90 + $1.33 = $2.23/gallon
Part B
Excess capacity costs assigned to the season requiring it, then to products produced in that season. Thus,Winter:
Overhead rate = ($16,950 × 50%) ÷ 6,375 gallons)= $1.33/gallon
Product cost= $0.90 + $1.33= $2.23/gallon
Summer:
Overhead rate = [$16,950 + ($16,950 × 50%)] ÷ 12,750 gallons)= $1.99/gallon
Product cost= $0.90+ $1.99= $2.89/gallon
| Product cost | |
| Winter | 3.56 | Per gallon |
| Summer | 2.23 | Per gallon |
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