Keep-or-Drop: Traditional Versus Activity-Based Analysis
Nutterco, Inc., produces two types of nut butter: peanut butter and cashew butter. Of the two, peanut butter is the more popular. Cashew butter is a specialty line using smaller jars and fewer jars per case. Data concerning the two products follow:
Peanut
Butter Cashew
Butter Unused
Capacitya units of
Purchaseb
Expected sales (in cases) 50,000 10,000 - -
Selling price per case $100 $80 - -
Direct labor hours 40,000 10,000 - As needed
Receiving orders 500 250 250 500
Packing orders 1,000 500 500 250
Material cost per case $55 $48 - -
Direct labor cost per case $11 $9 - -
Advertising costs $300,000 $60,000 - -
aPractical capacity less expected usage (all unused capacity is permanent).
bIn some cases, activity capacity must be purchased in steps (whole units). These steps are provided as necessary. The cost per step is the fixed activity rate multiplied by the step units. The fixed activity rate is the expected fixed activity costs divided by practical activity capacity.
Annual overhead costs are listed below. These costs are classified as fixed or variable with respect to the appropriate activity driver.
Activity Fixeda Variableb
Direct labor benefits $0 $200,000
Machine 200,000 250,000
Receiving 200,000 22,500
Packing 100,000 45,000
Total costs $500,000 $517,500
a) Costs associated with practical activity capacity. The machine fixed costs are all depreciation with direct labor hours as the driver.
b) These costs are for the actual levels of the cost driver.