California Creamery Case

Case Study: California Creamery

PROBLEM

What costing method should the California Creamery Inc used to improve the company’s pricing policy?

OBJECTIVES

1. To know the difference between the two costing methods.
2. To analyze the costs associated with each individual product.
3. To determine the effect of the two costing method in total company profits.

AREAS OF CONSIDERATION

1. 14 retail ice cream stores. Sold only the highest quality.
2. A few of the exotic flavors sold in low volumes.
3. Prices are set to yield roughly, a markup of 100% on average full production costs.
4. A proportion of the direct labor used in the production process.
5. Charged the overhead to products at rate of 200% of direct labor costs.
6. Will’s pricing strategy was not accurate as all products were sold at the same retail price.
7. The most significant production costs: Raw materials, special flavor ingredients, and for the acquisition, operation and maintenance of the production equipment.

ACAs (Alternative Courses of Action)

ACA 1: Compute the full production cost (per gallon) of the Polynesian Fantasy and Vanilla products using:

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1.  Will’s old costing method

1. Louise’s Suggested method

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ACA 2: Identify the differences between the two costing methods material in terms of:

1. Their effect on individual costs.

• The ABC method gives both accurate description of the costs and product's profitability Instead of placing the Direct Labour as the product base, the ABC method divides the Overhead costs into various activities based on activity's  consumption in producing the product

1. Their effect on total company profits.

• There will be no any effect in the total of the company profit by the change in company's costing method as the whole as costing is an internal process of profitability of a number of product will be compensated by a decrease in others.

1. Monitor the implementation of ABC method in order to examine the profitability of a product.

EVALUATION

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