South Dakota Microbrewery

Case Study
Kurran Singh
October 26, 2015

To achieve this goal while still selling all of their beer. While this would reduce the costs resulting from the cost driver of number of orders.50 per bottle). it is clear that the ale and the stout have gross margins that are higher than the targeted 30% gross margin for each beer. The bock sells at the highest price of the three beers ($1. Plant-wide allocation systems generally fail to accurately assign costs to different products. such a solution could also go against the goals of . the bock beer uses more units of each cost-driver except direct labor and number of bottles than either of the other two beers. and is useful for small companies with only one product line. The only disadvantage is the complexity of calculations. it is quicker and easier to use. It is only the bock that is proving to be an issue as far as profitability. and yet still sells at a loss due to the extremely high costs of producing the beer. and quality control inspections all are extremely high volume requirements for the bock. However. Having analyzed the costs using the activity-based cost method. The advantages of the activity-based cost system are that the unit prices calculated from this method are extremely close to the actual cost of producing the item. and therefore appears to be profitable when only direct labor hours are used to allocate costs. Thus. and based on the inaccurate cost breakdowns of the plant-wide allocation method. or only a few very similar products. The disadvantages however are quite significant.3. direct labor hours. The worries of the owners about the gross margin of the Buffalo Ale being too low are unfounded. large companies can use this method to accurately estimate the cost of each product. Because it breaks down the costs drivers for each product line. number of orders. machine hours. The plantwide allocation system tends to be inaccurate due to the different amounts of resources used by different product lines at the same company. 4. as they are required for the production of the beer no matter what. meaning that both the data as well as the actual math involved are comparatively simple and easy as opposed to the more complex activity-based cost system. shipping costs. The biggest issue the South Dakota Microbrewery faces is the negative gross margin of their Bismark Bock beer. While it require less direct labor hours than the other two beers. Fermentation days. which are currently the highest changeable cost associated with the bock. could also be reduced. and machine hours are fairly difficult to change. Fermentation days. if the number of orders were reduced. The advantages of the plant-wide allocation based solely on direct labor hours are the simplicity of calculation. the brewery would need to find more high volume customers.

In order to keep the amount of beer the same. . Each bottle requires filling and labeling costs. meaning that the total net income is the same whether ABC is used or a plant-wide allocation system is used. Such a plan may be impractical however. and a total annual gross margin of $7. Another cost driver whose volume could potentially be reduced is the number of bottles per batch. it is far better than the losses that were being incurred before the suggested changes. While not at the 30% goal. With the proposed changes. If the number of inspections could be reduced to 11 inspections per batch. Finally.reaching a wider audience with the brewery’s craft beers. The brewery currently has 22 inspections per batch for the bock compared to 4 and 8 for the ale and stout respectively.140. while still reducing costs roughly $24 per batch. Based on the facts outlined above. While the process of brewing the bock is much more complicated than the process of brewing the ale or the stout. the gross margin per batch would increase by $99 to $59. considering that it would place the number of orders at the same level as the stout. the following changes are recommended. as it could involve extra costs with changing the machinery to support different bottle sizes. and therefore the fewer bottles. the brewery should lower their expectations and be satisfied with the 10% margin for the bock. In addition.50 per batch. The allocation cost system used does not affect total net income. and still far higher than the ale. costs would be reduced by another $75 per batch. since customers would have fewer places from where they can purchase the beers. each batch could still have far more attention than either the ale or the stout. the lower the cost. which means a gross margin percentage of roughly 10%. the cost driver that seems to be the best solution in reducing the cots of production for the bock and therefore increasing the gross margin is the number of quality inspections per batch. which would thus lower the costs of labeling and filling all of the bottles. The total net income calculated in exhibits 3 and 4 are essentially the same. having 22 inspections per batch seems excessive. 5. the brewery could have larger volume bottles. especially considering how high the gross margins are for their other two beers. Given the high costs of producing the bock. if the number of orders were halved as well in order to sell higher quantities to fewer bars and stores. Such a drop in the number of orders is reasonable. and the tough market conditions.

86 22.79 16.85 186.00 0.55 108.00 72.60 88.00 78.EXHIBIT 1 Direct Materials Cosy Direct Labor Cost Direct Labor Hours Overhead rate (116750 [overhead rate] / 7500 [total DL hours] Manufacturing Overhead (Labor Hours * Overhead rate) Total Product Cost per Batch Expected Yield in Cases Bottles (24 per case. 24 * expected yield in cases) Cost per bottle (in dollars) Based on Direct Labor Hours Bismark Four Heads Buffalo Ale Bock Stout 62.00 15.86 .00 0.00 12.57 15.00 13.84 347.00 0.00 432.57 15.57 280.00 18.91 202.41 369.26 450.00 384.96 18.95 89.00 528.

0 0 24.500.23 13.000.00 7.00 3.00 40.00 13.910.18 18.0 0 Activitybased cost system Total Volume Rate Buffalo Ale Activity Volume Cost Bismark Bock Activity Volume 2.0 0 317.00 7.71 4.00 75.00 82.00 229.00 47.00 325.60 108.EXHIBIT 2 Fermentation Days Direct Labor Hours Machine Hours Number of Orders Number of Quality Control Inspections Number of Bottles per Batch Total Manufacturing Overhead Cost Direct Materials Cost Direct Labor Cost Total Cost Number of Bottles Cost per Bottle Total Cost 38.95 432.82 22.0 0 7.16 5.00 8.20 10.500.850.1 4 62.32 14.00 13.250.11 147.00 18.3 8 432.00 0.00 110.00 Four Heads Stout Activity Volume Cost 4.88 .4 0 9.00 135.0 0 0.8 3 89.00 21.00 45.7 4 528.60 384.00 16.00 52.07 3.10 528.5 5 88.00 12.00 615.920.700.08 454.00 5.00 8.09 211.8 2 12.36 2.00 17.00 Cost 182.500.0 0 0.60 78.740.500.06 1.5 0 384.0 0 1.0 0 10.00 0.98 18.000.00 31.61 150.00 379.63 8.55 72.00 39.0 0 2.32 55.

EXHIBIT 3 Price per bottle Number of Bottles Total Revenue Total Cost Gross Margin Per Batch Gross Margin % Number of Batches Total Gross Margin (batches * GM per batch) Buffalo Ale 1.40 528.00 576.86 37.00 .74 236.42 -6.164.50 1.50 225.00 384.00 EXHIBIT 4 Price per bottle Number of Bottles DL Plantwide Overhead Gross Margin Calculations Buffalo Bismark Ale Bock Four Heads Stout 1.69 250.00 432.00 59.05 1.00 554.66 42.47 27.476.40 317.739.40 384.27 120.050.38 -39.00 -4.80 615.88 81.00 604.50 1.05 528. 59 ABC Gross Margin Calculations Bismark Four Heads Bock Stout Total 1.50 379.00 432.00 120.

40 450.0 0 .83 120.62 120. 00 576.84 38.180.79 228.86 103.885.80 81.00 27.00 347.00 25.96 234.68 250.21 39.385.20 604.451.00 28.54 18.Total Revenue Total Cost Gross Margin Per Batch Gross Margin % Number of Batches Total Gross Margin (batches * GM per batch) 554.80 369.