Introduction
The soft drink factory’s controller recently attended a trade fair and spoke to several controllers
working for competitors. They told him that their company is using the “cost centre” accounting
method. Since the factory has quite a lot of indirect costs and it is difficult to allocate the costs to a
product, the controller wants to investigate what benefits this method may have for him. Eventually,
he hopes to gain more insight into the price structure of a product.
Data on costs
At the soft drink factory, the cost price of a carton of Ice Tea or a bottle of sports drink is based on the
following data:
There are two different departments (department I and department II) within the organisation. In
each department, part of a product is being processed.
The standard production volume for Ice Tea is 3,000,000 cartons and the expected production volume
is 3,500,000 cartons. As for the Sport Drink, the standard production volume is 4,750,000 bottles and
the expected production volume is 5,500,000 bottles.
The profit mark-up for both products is 15%.
| Ice Tea | Sports drinks | |
| Per unit: Resources: -Water -Sugar -Fructose syrup – Lemon juice – Vitamin powder – Tea – Package – Bottle Per ten units: Direct labour Per 100 units: Machine time department 1 Machine time department 2 |
1,5 liter 150 gram – 40 ml – 20 gram 1 unit – 1,3 min 0,8 min 0,5 min |
0,5 liter – 30 ml – 3 gram – – 1 unit 0,9 min 0,7 min 0,3 min |
| Kosten |
| Water (per liter) € 0,010 Sugar (per kg) € 0,510 Fructose syrup (per liter) € 0,808 Lemon juice (per liter) € 5,150 Vitamin powder (per kg) € 50,579 Tea (per kg) € 2,822 Package (per unit) €0,051 Bottle (per unit) €0,080 Direct Labour (per hour) €30 |
2
Indirect costs
The soft drink company is split up into 6 divisions:
Housing
Management
Purchasing & Logistics
Warehouse
Other (Financial administration, HRM and Legal)
Production
Sales (incl. Marketing)
As regards the indirect costs (€ 3,460,000), the initial costs are allocated to the cost centres as
follows:
Ancillary costs:
– Housing : € 230,000
– Management : € 350,000
– Purchasing & Logistics : € 395,000
– Warehouse : € 900,000
– Other (Financial administration, HRM and Legal) : € 250,000
Principal costs:
– Sales (e.g. Marketing) : € 350,000
– Production (Ice Tea and Sports Drink) : € 985,000
Ancillary costs
Housing
The ancillary cost centre for Housing specifies and passes on its costs to the other divisions, in
proportion to the floor area used. The floor area per division amounts to:
| Department | Floor area (in m2) |
| Management Purchasing & Logistics Warehouse Other Production Sales Total |
350 340 1.800 200 2.000 150 4.840 |
Management
The costs of this division are allocated the cost centres, from Purchasing & Logistics to Sales, in the
ratio 3 : 1 : 2 : 4 : 2 (stick to the order given under the heading of the indirect costs).
3
Purchasing & Logistics
The costs are allocated to the divisions according to the percentages below
| Other | : 10% | |
| Production Ice Tea Production Sports Drink |
: 40% | : 50% |
Warehouse
As the soft drink producer produces in large numbers and thus has high inventories, the warehouse
costs are allocated to the production of both products. This is done on the basis of the standard
production volume (ratio between the products Ice Tea and Sports Drink).
Other (Financial administration, HRM and Legal)
The remaining costs are passed on to both production departments according to the ratio 2: 3
(Ice Tea : Sports Drink)
Principal costs
Production
There are two products that are being produced: Ice Tea and Sports Drink. The costs are passed on
on the basis of a rate per machine hour.
Sales (incl. Marketing)
The costs are passed on on the basis of a rate in % of the total turnover. The turnover is estimated at
€ 9,000,000.
Assignment:
The controller would like to enter the cost center method. He has already done some preliminary
work, but has not yet reached a concrete cost price. The task for your group is to calculate the
commercial cost price for both a pack of ice tea and a bottle of sports drink. Then also calculate the
sales price per product.
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