ACC 550 Module 5 Milestone Two Example

From 43 Cents a Pound to $1.42: An Activity-Based Model of Post-Shelling Overhead by Channel

[Student Name]

Southern New Hampshire University

ACC 550: Cost Accounting

Final Project Milestone Two

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

From 43 Cents a Pound to $1.42: An Activity-Based Model of Post-Shelling Overhead by Channel

Introduction

Milestone One found that the sheller's single overhead rate of about 43 cents a pound undercosts retail packs, which drive most packaging changeovers and customer orders. This milestone builds an activity-based model for the $6.2 million of post-shelling overhead, assigns it to the two channels, retail packs and bulk cartons, compares the result with the old rate and tests whether the conclusion holds under different assumptions. Kaplan and Anderson (2007) note that activity-based models fail when they become too detailed to maintain; this model uses five pools and drivers the company already records, consistent with the criteria set in Milestone One.

Activity Pools and Drivers

Table 1. Activity Pools, Drivers and Rates

Each driver reflects what causes the pool's cost to change. A changeover takes a crew about 45 minutes and wastes some film and nuts, regardless of the size of the following run, so the number of changeovers drives the cost. Each lot must be sampled, tested for moisture and aflatoxin and labeled with a lot code, so lots drive testing. Orders drive customer service and billing work. Pallet movements drive forklift time and labor. Packaging hours capture the run time of the lines. All five drivers are recorded in the plant's scheduling, laboratory, order and warehouse systems.

Assigning Costs to Channels

Table 2. Overhead Assigned by Channel

The model assigns the full $6.2 million, the same total as the old system. Retail packs, 18 percent of pounds, receive 61 percent of the overhead.

Comparison With the Old System

Under the old rate, retail packs carried about $0.43 a pound of post-shelling overhead, or $1.13 million in total; under the model, they carry $1.42, or $3.78 million. Bulk cartons fall from $0.43 to $0.20 a pound. The shift, about $2.65 million, comes mostly from changeovers and orders: retail customers order frequently in small, mixed quantities, and each order and size change triggers work that has nothing to do with pounds. Warehouse handling moves the other way; bulk cartons, shipped by the pallet, account for most pallet movements, so this pool slightly offsets the shift.

Sensitivity

The driver volumes rest partly on the packaging supervisor's estimates. If retail's share of changeovers were 70 percent rather than 80, and its share of orders 70 rather than 80, retail overhead would be about $1.32 a pound. If packaging hours were split evenly rather than 60 to 40, it would fall another 4 cents. Under every reasonable combination tested, retail overhead stays above $1.20 a pound, about three times the old rate. The conclusion that retail packs are significantly undercosted does not depend on precise driver estimates.

What the Result Means

For retail pricing, a $1.42 overhead cost per pound means an 8-ounce pack carries about 71 cents of post-shelling overhead, not 21 cents. With nut, shelling and packaging material costs, the pack's full cost is close to its wholesale price to grocery chains, leaving little margin. The candy division, a small-lot internal buyer of halves, will be costed with the same model when transfer prices are set in Module Nine. For customer selection, the model can be applied to individual retail chains using their own order and changeover counts. Banker et al. (2008) found that activity-based costing improves performance mainly when it is used alongside operational changes, so the model's most valuable use may be to show where reducing changeovers and small orders would save the most, as Module Four proposed.

Checking the Model Against the Criteria

Milestone One set five criteria, and the model meets each. It replaces the single rate with five activity pools, each tied to its cause. It reports cost by channel and can be extended to customers by applying each retailer's own order, changeover and lot counts. It uses drivers already recorded in plant systems, so updating it requires no new data collection. Nut and shelling costs stay outside it, handled separately as joint costs. And with only five pools the plant controller can keep it current without help; a first version was built in two days from existing reports. One criterion is only partly met: packaging hours by channel still rely on the supervisor's estimate, and a two-week time study is recommended to replace it.

A Customer-Level Example

Applying the rates to a single grocery chain shows the model's practical value. The chain ordered 640 times last year, triggered 260 changeovers and 190 test lots, generated 1,100 pallet movements and used 1,400 packaging hours for 190,000 pounds. Its overhead under the model is $376,000, or $1.98 a pound, above the retail average because it orders in especially small lots. Under the old rate it carried $81,000. That single comparison explains why the sales team believed the chain was one of the company's best retail accounts.

Implementation

The model can be maintained in a spreadsheet updated each quarter from existing systems, with pool costs from the general ledger and driver volumes from scheduling, laboratory, order and warehouse reports. Labro (2019) emphasizes that a costing system's value depends on being kept current; a quarterly update keeps the effort small. The model is for internal decisions; inventory for financial reporting continues to use the existing method.

Conclusion

A five-pool activity-based model assigns $3.78 million of post-shelling overhead to retail packs, $1.42 a pound, and $2.42 million to bulk cartons, $0.20 a pound, compared with 43 cents for both under the old rate. Plausible changes to the driver estimates do not alter that conclusion, and retail packs earn far less than reported. Milestone Three will use these costs in budgeting and performance evaluation.

References

Banker, R. D., Bardhan, I. R., & Chen, T.-Y. (2008). The role of manufacturing practices in mediating the impact of activity-based costing on plant performance. Accounting, Organizations and Society, 33(1), 1-19. https://doi.org/10.1016/j.aos.2006.12.001

Kaplan, R. S., & Anderson, S. R. (2007). Time-driven activity-based costing: A simpler and more powerful path to higher profits. Harvard Business School Press.

Labro, E. (2019). Costing systems. Foundations and Trends in Accounting, 13(3-4), 267-404. https://doi.org/10.1561/1400000058