Deena’s Ice Cream Factory Ltd specialised in producing two types of gourmet ice creams sold

directly to restaurants in 5 litre containers. The company produces Vanilla Liqueur Fantasy
(VLF) and Chocolate Nut Sins (CNS). The VLF product is relatively straight forward to
produce, however the CNS product requires special layering of different flavours of chocolates
and nuts.
All costing information is based on the following expected output for 2017.
Expected demand and output for 2017:
Vanilla Liqueur Fantasy (VLF) 60,000 containers
Chocolate Nut Sins (CNS) 20,000 containers

Selling Prices:
Vanilla Liqueur Fantasy (VLF) $33 per container
Chocolate Nut Sins (CNS) $44 per container

Budgeted Costs for 2017: $ $ $

Direct Costs: VLF CNS Total
Direct labour 132,750 96,300 229,050
Direct materials 70,504 42,000 112,504
Total Direct Costs 203,254 138,300 341,554

Scotty, the accountant for Deena’s Ice Cream Factory Ltd has been using the traditional
approach to overhead allocation. Production overheads are allocated to products using labour
as the allocation base. Variable production overheads are 30% of labour cost. Fixed production
overheads are 110% of labour cost at the budgeted 2017 level of production. Selling and
Administration is 20% of the selling price, with half being fixed and half being variable.
Recently Scotty has had some concerns about the accuracy of the costing information
produced. The production system is significantly automated but the overhead allocation is
based on labour costs. He has investigated the activity based costing (ABC) approach and has
come up with the following budgeted figures for the cost drivers and their related activities.
ABC Approach:
Activity 2017 Budgeted Cost Driver
Machine set-ups $252,500 Machine set-ups
Machine running $317,250 Machine hours
Materials handling $113,601 Number of materials requisitions
Inspections $89,648 Number of inspections
Sales order processing $75,675 Number of orders processed
Total Cost $848,674

Expected use of activity drivers for the level of production predicted for 2017:
VLF CNS Total
Driver:
Machine set-ups 400 600 1,000
Machine hours 4,000 6,000 10,000
Number of materials requisitions 80 220 300
Number of inspections 60 140 200
Number of orders processed 300 200 500
Required:

(a) Use the traditional overhead allocation method to calculate for both products:
i) The total cost (round to nearest $)
ii) The profit percentage (round to nearest %)
(b) Use the ABC approach to calculate for both products:
i) The total cost (round to nearest $)
ii) The profit percentage (round to nearest %)

(c) Based on the findings from (a) and (b) above (total costs and profit) what recommendations
should Scotty make to Deena?

(d) A special order for Chocolate Nut Sins (CNS) has been received by Deena. The customer
wants to place and order of 5,000 containers for a special price of $40.00 per unit. The
factory is working at 80% capacity at its current budgeted level. Variable cost per unit has
been estimated to be $12 per container. There will be no other fixed costs incurred for this
special order.

i) Should Scotty advice Deena to accept the special order from the customer? Give
your reasons and supporting calculations.

ii) The customer was pleased with the quality and popularity of the CNS ice-cream
product and now wants to increase the order to 25,000 units on an annual basis at
the same special price of $40 per unit. Should Deena continue to supply this
customer on annual basis at this price? Explain your answer clearly.