1.

Traditional volume-based method has limitations when allocating overhead costs for Van
Tiel’s Nourishing Drinks Ltd drinks. This type of method can impact the accuracy when
finding the actual expense incurred by Van Tiel’s Nourishing, which interferes with
determining the cost per unit and the products price (mark-up and products profit margins).
Therefore, impacting the overall total sales and profit for Van Tiel’s Nourishing.

2. ABC provides a more accurate method of costing that leads to more accurate pricing of Van
Tiel’s Nourishing Drinks Ltd drinks. It also allows Van Tiel’s Nourishing Drinks Ltd to
understand their cost drivers, overheads, and will show them activities that are wasteful and
costly which will allow them to reduce or eliminate these activities. ABC will also improve
their overall product sales and profitability.

3.

a. Overhead allocation

Nourish1 $16,000 x 1,600/3,200 = $8,000

Extra Nourish 16,000 x 900/3,200 = $4,500
Super Nourish 16,000 x 700/3,200 = $3,500

b. Total direct costs

Nourish1 11 x 1,600 = 17,600

Extra Nourish 14 x 900 = 12,600
Super Nourish 21x 700 = 14,700

c. Total costs

Manufacturing “ “ per unit Total cost “ “ per unit

cost
Nourish1 8,000 8,000/1,600 = $5 25,600 21
Extra Nourish 4,500 4,500/900 = $5 17,100 24
Super Nourish 3.500 3,500/700 = $5 18,200 31

d. Profit and margin

i. Nourish1

Sales @$20 Total cost Profit Margin % (2nd)

$32,000 25,600 $6,400 20%

ii. Extra Nourish

Sales @$25 Total cost Profit Margin % (1st)

$22,500 17,100 $5,400 24%
 iii. Super

Sales @$30 Total cost Profit Margin % (3rd)

21,000 18,200 $2,800 13.33%

4. ABC

Activities Nourish1 Extra Nourish Super Nourish Total Cost driver rate
Bottling machine set-ups 25 35 40 100 $20
Maintenance 400 350 250 1,000 $1.50
Depreciation 400 350 250 1,000 $2.50
Testing and inspection 10 10 30 50 $80
Administration and sales 100 120 80 300 $20

Overhead costs

Nourish1 ($) Extra Nourish ($) Super Nourish ($)

Bottling machine set-ups 500 700 800
Maintenance 600 525 375
Depreciation 1,000 875 625
Testing and inspection 800 800 2,400
Admin and sales 2,000 2,400 1,600

Per unit costs

Nourish1 ($) Extra Nourish ($) Super Nourish ($)

Bottling machine set-ups 0.31 0.78 1.14
Maintenance 0.38 0.58 0.54
Depreciation 0.63 0.97 0.89
Testing and inspection 0.50 0.89 3.43
Admin and sales 1.25 2.67 2.29

Profit and margin

Nourish1 ($) Extra Nourish ($) Super Nourish ($)

(1st) (2nd) (3rd)
Bottling machine set-ups 0.31 0.78 1.14
Maintenance 0.38 0.58 0.54
Depreciation 0.63 0.97 0.89
Testing and inspection 0.50 0.89 3.43
Admin and sales 1.25 2.67 2.29
Direct costs 11 14 21
Total cost per unit 14.07 19.89 29.29
Sale price per unit 20 25 30
Gross profit 5.93 5.11 0.71
Gross profit % 29% 20% 2.3%
5. Comparing between the two different types of methods there are quite different results.
Traditional highest ranking was extra nourish, nourish, and super nourish and ABC ranking
was nourish, extra nourish, and super nourish. The only similarity was that method found
that super nourish had the lowest profit margin, but both also had different highest profit
margins.
6. I recommend for management to use the ABC method as it is the most reliable and accurate
to obtain the best results. The management team can tell what cost belong to what, what
the cost driver is how much is per unit.