Ultimate potatoes (UP) operates at capacity and processes potatoes into potato cuts at its highly automated Boise plant. It sells potatoes to the retail consumer market and to the institutional market, which includes hospitals, cafeterias, and university dorms.

UPs simple costing system has a single direct cost category (direct materials, which are the raw potatoes) and a single indirect cost pool (production support). Support costs are allocated on the basis of pounds of potato cuts processed. Support costs include packaging materials. The 2019 total actual costs for producing 1,000,000 pounds of potatoes cuts (800,000 for the retail market and 200,000 for the institutional market) are:

• Direct materials used: $200,000
• Production Support: $1,170,000

The simple costing system does not distinguish between potato cuts produced for the retail and the institutional markets.

At the end of 2019, UP unsuccessfully bid for a large institutional contract. Its bid was reported to be 25% above the winning bid. This feedback came as a shock because UP included only a minimum profit margin on its bid. Moreover, the Boise plant was acknowledge as the most efficient in the industry.

As a result of its review process of the lost contract bid, UP decided to explore ways to refine its costing system. First, it identified that $230.000 of the $1,170,000 pertaining to packaging materials could be traced to individual Jobs ($210,000 for retail and $20,000 for institutional). These costs will now be classified as direct materials. The $200.000 of direct materials used were classified as $160,000 for retail and $40,000 for institutional. Second, it used ABC to examine how the two products (retail potato cuts and institutional potato cuts) used indirect support resources. The finding was that three activity areas could be distinguished:

• Cleaning activity area: UP uses 1,200,000 pounds of raw potatoes to yield 1.000.000 pounds of potato cuts. The cost driver is pounds of raw potatoes cleaned. Costs in the cleaning activity area are $200,000
• Cutting activity area: UP processes raw potatoes for the retail market independently of those processed for the institutional market. The production line produces (a) 400 pounds of retail potato cuts per cutting hour and (b) 500 pounds of institutional potato cuts per cutting hour. The cost driver is cutting hours on the production line. Costs in the cutting area are $262.000.
• Packaging activity area: UP packages potato cuts for the retail market independently of those packaged for the institutional market. The packaging line packages (a) 50 pounds of retail potato cuts per packaging hour and (b) 200 pounds of institutional potato cuts per packaging hour. The cost driver is packaging hours on the production line. Costs in the packaging activity area are $478.000.

1. Using the simple costing system, what is the cost per pound of potato cuts produced by UP?
2. Calculate the cost rate per unit of the cost driver in the (a) cleaning, (b)cutting and (c) packaging activity areas.
3. Suppose UP uses information from its activity cost rates to calculate costs incurred on retail and institutional potato cuts. Using ABC system, what is the cost per poiund of (a) retail potato cuts and (b) institutional potato cuts?
4. Comment on the cost differences between the two costing systems in 1 and 3. How might UP use the information in 3 to make better decisions?