Managerial Accounting:

Case Study
California Creamery,
Inc.
Presented by: Group 3( Section2)
Sudarshan Kumar Dey, Sulabh Singh, Chauhan, Sunny
Shekhar, Tarun Dahiya, Umesh Kumar, Sumit Kumar Jha
 Introduction
• 14 retail ice cream stores spread throughout Southern California, from Sans Luis
Obispo to San Diego
• High quality and ultra premium ice creams – 25 different flavours
• E.g. “Exotic”, “Polynesian Fantasy”, “Mango-Lemon Supreme”, “Multi-Nut Twist” and also
some traditional flavours like Vanilla, Chocolate, etc.
• Produce their own ice cream and originally was produced in the garage of the
company’s founder, Will Forgey and had since leased a building
• Have expensive, automated manufacturing equipment for blending and packaging
• Most significant cost were for raw material, particularly cream, sugar, and special
flavour ingredients and for acquisition, operation, and maintenance of equipment
• All CCI’s products were sold at same retail price – roughly a margin of
100% on average full cost
• As per CCI’s 2014 budget, Manufacturing over head was $ 600,000 –
proportioned on the bases of direct labour cost used in production process
of different products
• Total direct labour cost for 2004 was $ 300,000 and charged the overhead
to products @ 200 % of direct labour costs
• Louise Fettinger, his neighbour suggested to change his pricing policy to
“Activity Based” cost system
 Activity Based Costing
• Activity based costing (ABC) assigns manufacturing overhead costs to
products in a more logical manner than the traditional approach of simply
allocating costs on the basis of labor cost, machine hours etc.
• This first assigns costs to the activities that are the real cause of the
overhead
• Then assigns the cost of those activities only to the products that are
actually demanding the activities
 Exhibit 1
Budgeted Activity
"Driver" of the Activity's
Activity Budgeted Cost Level for the Cost Cost/ Unit
Costs
Driver
Purchasing $ 80,000.00 Purchase orders 909 $ 88.01
Material Handling $ 95,000.00 setups 1846 $ 51.46
Blending $ 122,000.00 Blender hours 1000 $ 122.00
Freezing $ 175,000.00 Freezer hours 1936 $ 90.39
Packaging $ 110,000.00 Packeging Machine hours 1100 $ 100.00
Quality Control $ 18,000.00 Batches 286 $ 62.94
Total Manufacturing
overhead costs $ 600,000.00
 Exhibit 2
Polynesian
Activity Vanilla Unit
Fantasy

Direct Material $ 2.00 $ 1.80 per gallon

Direct Labor $ 1.20 $ 1.20 per gallon
Budgeted production and sales 2000 100000 gallons
Batch size 100 2500 gallons
Setups 3 3 per batch
Purchase order size 50 1000 gallons

Blender time 0.6 0.3 hr/ 100 gallons

Freezer time 1 1 hr/ 100 gallons
Packaging machine time 0.3 0.2 hr/ 100 gallons
 Old costing method
Polynesian
Activity Vanilla Unit
Fantasy
Direct Material $ 2.00 $ 1.80 per gallon
Direct Labor $ 1.20 $ 1.20 per gallon
Budgeted production and sales 2000 100000 gallons

Cost
Direct Labor $ 2,400.00 $ 120,000.00
Direct Material $ 4,000.00 $ 180,000.00

Overhead $ 4,800.00 $ 240,000.00

Total Cost $11,200.00 $ 540,000.00
Cost per unit $ 5.60 $ 5.40 Full Cost/ gallon
 Activity Based Costing
Budgeted Activity
"Driver" of the Activity's
Activity Budgeted Cost Level for the Cost Cost/ Unit
Costs
Driver
Purchasing $ 80,000.00 Purchase orders 909 $ 88.01
Material Handling $ 95,000.00 setups 1846 $ 51.46
Blending $ 122,000.00 Blender hours 1000 $ 122.00
Freezing $ 175,000.00 Freezer hours 1936 $ 90.39
Packaging $ 110,000.00 Packeging Machine hours 1100 $ 100.00
Quality Control $ 18,000.00 Batches 286 $ 62.94
Total Manufacturing
overhead costs $ 600,000.00

Total Batches 20 40
Total Setups 60 120
Total Purchase orders 40 100
Total Blending Time 12 300 hours
Total Freezing Time 20 1000 hours
Total Packeging Time 6 200 hours
 Polynesian
Direct Cost Vanilla
Fantasy
Direct Labour $ 2,400.00 $ 120,000.00
Direct Material $ 4,000.00 $ 180,000.00
Total Direct Cost $ 6,400.00 $ 300,000.00

Polynesian
Over head cost Vanilla
Fantasy
Purchasing O/H $ 3,520.35 $ 8,800.88
Material Handling O/H $ 3,087.76 $ 6,175.51
Blending O/H $ 1,464.00 $ 36,600.00
Freezing O/H $ 1,807.85 $ 90,392.56
Packaging O/H $ 600.00 $ 20,000.00
Quality Control O/H $ 1,258.74 $ 2,517.48
Total over head cost $ 11,738.70 $ 164,486.44

Polynesian
Over head cost Vanilla
Fantasy
Total Cost $ 18,138.70 $ 464,486.44
Unit Cost $ 9.07 $ 4.64
 Impacts of change in costing method
a)On individual product cost
• Pricing strategy – currently the pricing is not accurate
• ABC gives the accurate description of cost and product’s profitability
• In traditional method one product was under-priced where as the other was over-priced
b)On company profit (Keeping no changes in operating decisions, such as prices
and production process)
• Change in costing is an internal process of profitability and does not affect the overall
profitability if the prices and production process are kept same
• But it may be very crucial for taking decision on future pricing of the product which will
also impact the profits in long run
 What should Will do now ?
• He should implement the ABC in their business
• Though it will not increase the overall profits if the selling price are kept
same but it will help in analysing the cost associated with each product to
improve the process and efficiency of the company
• ABC will give an accurate cost of each product, which will help in future
pricing strategy which eventually will also affect the profitability over all
as variation in price will also affect the demand of the products
Thank You