Bronson Shrimp Farms, in Brewton, Alabama, has a Processing Department that processes raw shrimp into two products:

• Headless shrimp

• Peeled and deveined shrimp

Bronson recently submitted bids for two orders: (1) headless shrimp for a cruise line and (2) peeled and deveined shrimp for a restaurant chain. Bronson won the first bid but lost the second. The production and sales managers are upset. They believe that Bronson’s state-of-the-art equipment should have given the company an edge in the peeled and deveined market. Consequently, production managers are starting to keep their own sets of product cost records. Bronson is reexamining both its production process and its costing system. The existing costing system has been in place since 1991. It allocates all indirect costs based on direct labor hours. Bronson is considering adopting activity-based costing. Controller Heather Barefield and a team of production managers performed a preliminary study. The team identified six activities, with the following estimated indirect costs and allocation bases for the Processing Department for 2014:

The raw shrimp are chilled and then cut. For headless shrimp, employees re-move the heads, then rinse the shrimp. For peeled and deveined shrimp, the head-less shrimp are further processed—the shells are removed and the backs are slit for deveining. Both headless shrimp and peeled and deveined shrimp are packaged in foam trays and covered with shrink wrap. Order-filling personnel assemble orders of headless shrimp as well as peeled and deveined shrimp.
Barefield estimates that Bronson will produce 10,000 packages of headless shrimp and 50,000 packages of peeled and deveined shrimp in 2014. The two products incur the following costs and activities per package:

Bronson pays direct laborers $ 20 per hour. Barefield estimates that each product line also will require the following total resources:

Requirements
Form groups of four students. All group members should work together to develop the group’s answers to the three requirements.
1. Using the original costing system with the single indirect cost allocation base (direct labor hours), compute the total budgeted cost per package for the head-less shrimp and then for the peeled and deveined shrimp. Round to two decimal places.
2. Use activity- based costing to re- compute the total budgeted cost per package for the headless shrimp and then for the peeled and deveined shrimp. Round to two decimal places.
3. Write a memo to Bronson CEO Gary Pololu explaining the results of the ABC study. Compare the costs reported by the ABC system with the costs reported by the original system. Point out whether the ABC system shifted costs to-ward headless shrimp or toward peeled and deveined shrimp, and explain why. Finally, explain whether Pololu should feel more comfortable making decisions using cost data from the original system or from the new ABCsystem.

Transcribed Image Text:

Estimated Total Activity Cost of Activity Allocation Base Redesign of production process (costs of changing process and equipment) Production scheduling (production scheduler's salary) Chilling (depreciation on refrigerators) Processing (utilities and depreciation on equipment) Packaging (indirect labor and depreciation on equipment) Order filling (order-takers and shipping clerks' wages) Total indirect costs for the entire department 5,000 Number of design changes 6,000 1,500 19,200 1,425 7,000 40,125 Number of batches Weight (in pounds) Number of cuts Cubic feet of surface exposed Number of sales orders Costs and Activities per Package Headless Shrimp Peeled and Deveined Shrimp $ 4.50 0.05 0.02 Shrimp Foam trays Shrink wrap Number of cuts Cubic feet of exposed surface Weight Direct labor hours 3.50 $ 0.05 $0.05 1 cut 1 cubic foot 3 cuts 0.75 cubic foot 1 pound 2.5 pounds 0.01 hour 0.05 hour Headless Shrimp (for all 10,000 packages) Peeled and Deveined Shrimp (for all 50,000 packages) Design changes Batches Sales orders 1 change 40 batches 90 orders 4 changes 20 batches 110 orders