Case Title: Soft drink and Beer

Point of View:
This case study will take the point-of-view of a Business Analyst or Mr. Buenafe by using
the available data and information to provide and help them decide on what strategy to use
best.
Statement of the Problem:
The following questions must be answered:
1. Should they have new terms of the contract to be renegotiated or for PMC to entirely beg
off from renewing the contract?
2. What are the costing systems that PMC could apply?
3. What is the appropriate costing system Mr. Buenafe should apply?
4. What will be the decision of Mr. Buenafe regarding the soft drink contract after using the
appropriate costing system?
Objective:
● To identify and classify appropriate allocation for costs in the company’s operations to
both beverage contracts
● To assess the profitability of soft drinks contract
● To decide whether or not new terms of the contract for soft drinks should be renegotiated
or if PMC should entirely beg off from renewing the contract

Areas of Consideration:

I. Internal Environment STRENGTHS WEAKNESS

a. HRD - The company have enough -The workload of the dispatchers,

employee to run the business
warehousemen, and checkers occurs
only a dispatch or a delivery is made.
-Additional contracts for soft drinks
brands may need additional
employees.
 b. Operating/Production - It reacquired its subsidiary that
Dept. produces a leading soft drink brand
and beer products.
- Inventories are transported from
Davao City, where the nearest bottling -The administrative staff process
plant manufacturers are located.
c. Marketing Department - Marketing was easy since they
became the distributor of a
well-known brand of beer.
d. Accounting/Finance - The business entity is profitable.
Dept.
II. External Environment OPPORTUNITY
a. Political/Legal Aspect N/A
b. Economic Aspect - They operate as the distributor of a
-The lease contract for warehouse
space was based on the area of the
warehouse, thus a proper allocation
scheme should be needed.
increases as the number of invoices
and record documents are made.
-They own 7 fully depreciated trucks,
which may cause more repair and
maintenance expenses.
- They need the assistance of another
cargo truck company for the operation.
-as the new contract will be made with
soft drinks, a new marketing strategy
must be formulated to make
consumers aware of their new product.
-The determination of the proper
amount of costs to be allocated to both
beverages is not well.
-additional contract for the soft drinks
brand will increase salaries expense
and other expenses.
THREAT
They are required to comply, with
applicable laws in the numerous
countries throughout the world in which
they do business. In many jurisdictions,
compliance with competition laws is of
special importance to them.
There was tough competition between
 well-known brand of beer that covers Coke and Pepsi for market share, and
the southern towns of the provinces of this occasionally hampered profitability.
Surigao del Sur and Davao Oriental.
- Revenues are extremely concentrated
in this industry, with Coke and Pepsi,
together with their associated bottlers.
- A new contract to distribute soft drinks
brands leads to an increase in the
source of income.

c. Socio-cultural The Soft Drink Industry consists of
establishments primarily engaged in
manufacturing non-alcoholic,
carbonated beverages, mineral waters
and concentrates, and syrups for the
manufacture of carbonated beverages.
This industry would include concentrate
producers and bottlers
They deal with similar suppliers and
buyers. Entry into the industry would
involve developing operations in either
or both disciplines. Beverage
substitutes would threaten both
concentrated producers and their
associated bottlers.

d. Technology Customers can easily do their job with Other Businesses/companies offer
the use of technology and good high-quality, more updated, faster
facilities, thus it can boost the cargo services.
profitability of the business.

ANALYSIS

Alternative Courses of Action (ACA)

ACA - 1
Mr. Buenafe could use the Simple/Traditional costing system

ADVANTAGES DISADVANTAGES

.- the calculation of the overhead rates is - There might be a failure to analyze

straightforward. the indirect costs
 - widely understood in the business. - There might be an inability to give
accurate product costs.

- Not expensive to operate. - There might be reliance on personal

or random choice rather than cause
and effect allocation of overheads.

- It offers accurate cost figures with - it offers limited accuracy

large production volumes

- Cheap to implement. - It does not account for

non-manufacturing costs.

- Creates reports that are easier to - Its simplicity may be too simple.
understand.

SOLUTION: Using Traditional Costing System

a. Cost objects: Soft Drinks and Beer
b. Direct Costs: Delivery charges & Cargo Charges.

c. Computation of Delivery charges

BEER SOFT DRINKS

Number of Dispatches 1,183 637

Multiply by: Variable Cost per dispatch 875 875

Total Charge: 1,035,125.00 557,375.00

d. Computation of Cargo Charges:

BEER SOFT DRINKS

Number of Trips 465 184

Multiply by: Charge per Trip 2,750 2,750

 Total Charge: 1,278,750.00 506,000.00

e. Computation of indirect Costs

Particulars Amount

a. Warehouse Rent Php350,000.00

b. Salary of Dispatcher 78,000.00

c. Salaries of Checker 145,000.00

d. Salaries of Warehousemen 160,000.00

e. Salaries of Administrative Staff 112,540.00

f. Utility Expense 90,000.00

g. Security services 110,600.00

Total Costs: Php1,046,140.00

f. Computation of rate per unit of each cost-allocation.

Sales Comission Rate Allocation

Beer 3,098,868.50 69.092396% 722,803.19

Soft Drink 1,386,239.40 30.907604% 323,336.81

Amount: 4,485,107.90 1,046,140.00

g. Compute for the indirect cost allocated to each product. The Result will
determine the profitability of the two products.

Beer Soft Drinks

Sales Commission 3,098,868.50 1,386,239.40

Less: Cargo Charges 1,278,750.00 506,000.00

Variable Delivery Costs 1,035,125.00 557,375.00

 2,313,875.00 1,063,375.00

Partial Operating Margin 784,993.50 322,864.40

Less: Warehouse Cost 722,803.19 323,336.81

Net Profit/ Lostt 62,190.31 (472.41)

ACA - 2
Mr. Buenafe could use the Activity-Based Costing System.

ADVANTAGES DISADVANTAGES

- Better Cost Measurements - Collection and preparation of data is

time-consuming

- Provides realistic costs of - Costs more to accumulate and

manufacturing for specific products. analyze information

- Allocates manufacturing overhead - Source data isn’t always readily

more accurately to products. available from normal accounting
reports.

- Determines product profit margins - It May is not as useful for companies

more precisely where overhead is small in proportion
to total operating costs.

- Discovers which processes have

unnecessary and wasted costs.

- Better understanding and justification of

costs in manufacturing overhead.

Solution: Using Activity-Based Costing System

a. Cost objects: Beer and Soft Drinks
b. Direct Cost of the products: Delivery Charges & Cargo Charges
c. Computation for Delivery Charges:
 BEER SOFT DRINKS

Number of Dispatches 1,183 637

Multiply by: Variable Cost per dispatch 875 875

Total Charge: 1,035,125.00 557,375.00

d. Computation for Cargo Charges:

BEER SOFT DRINKS

Number of Trips 465 184

Multiply by: Charge per Trip 2,750 2,750

Total Charge: 1,278,750.00 506,000.00

e. Cost Drivers: Floor Area & Number of Dispatches

Number of Trucks 7

Multiply: Number of Dispatches 5

Number of Weeks 52

Total 1,820

f. Indirect Costs associated with each cost-allocation base:

- Warehouse Rent
- Salary of Dispatcher, checker, and warehousemen
- Salaries of Administrative staff
- Utilities
- Security services
I. Fixed Activity Costs:

Warehouse Rent 350,000.00

 Security Services 110,600.00

Total 460,600.00

II. Variable Activity Costs:

Salaries of dispatcher 78,000.00

Salaries of Checker 145,000.00

Salaries of Warehousemen 160,000.00

Salaries of Administrative Staff 112,540.00

Utility Expense 90,000.00

Total 585,540.00

g. Computation for rate per unit of each allocation base is used to allocate indirect
cost to the products.

Fixed Cost 460,600/1,500 m^2 307.0666667/m^2

Variable Cost 585,540/1,820 Dispatches 321.7252747/Dispatch

h. Computation of indirect costs allocated to the products.

Beer Soft Drinks

Fixed Costs

(1,500 m2 x 60%) x 307.07/m2 276,360.00

(1,500 m2 x 40%) x 307.07/m2 184,240.00

Variable Costs

(1,183 dispatches x 321.74/dispatch) 380,601.00

(637 dispatches x 321.74/dispatch 204,939.00

Total 656,961.00 389,179.00

 i. Soft Drink Contract was commenced in July 2001, therefore any allocation scheme
that results in annual figures should allocate the only ½ of the amount to soft
drinks and “reallocate back” the other ½ to beer.
Computation:
Cost allocated to Soft Drinks: 389,179.00 x 6/12 = Php 194,589.50
Cost Allocated to Beer: 656, 961 + 194,589.50 = Php 851,550.50

j. Computation of profitability of two products:

Beer Soft Drinks

Sales Commission 3,098,868.50 1,386,239.40

Less: Cargo Charges 1,278,750.00 506,000.00

Variable Delivery Costs 1,035,125.00 557,375.00

2,313,875.00 1,063,375.00

Partial Operating Margin 784,993.50 322,864.40

Less: Warehouse Cost 851,550.50 194,589.50

Net Profit/ Lostt (66,557.00) 128,274.90

The result shows that using the Activity-Based Costing method, the beer has a net loss
of Php 66,557.00 while the soft drinks contract has a net profit of P128,274.90

Legend:

Good 1

Better 2

Best 3

Decision Matrix:

CRITERIA ACA #1 ACA #2

1. Profit 3 3
 2. Growth 1 3

3. Ease of Facilitation 3 1

4. Allocation of Costs 1 3

Total 8 10

Recommendation:
For the costing system to be deemed relevant, it must provide among others the cost
data about particular cost objects such as products that use the resources of the organization.
Thus, the Activity-Based Costing System shows reliable and accurate information about how
costs are computed in running the company. If Mr. Buenafe uses the traditional costing method,
he will refuse the contract because, after the computation of warehouse cost, it resulted in net
loss on soft drinks. The sales commission from the soft drink contracts wasn’t able to cover up
the costs incurred in its distribution. Yet, if he uses this traditional costing system, it may lead to
inaccurate data. This System uses all indirect costs in a single cost pool, therefore allocating
this based on the sales commission will create inaccurate data. Likewise, if there's a different
product that shares resources and these products do not consume the same resources equally,
a single allocation basis will understate the costs of one product while overstating the other
product. Therefore, the best Costing System to be used by Mr. Buenafe should be an
Activity-Based Costing System.

Plan of Actions:

ACTIVITIES PERSON ASSIGNED TIME FRAME BUDGET COST

1. Conducting the Human Resource One Month 0

Feasibility Research

2. Procurement of Funds Finance One to two months 0

3. Promotion and Marketing One month 20,000

Advertising

4. Operations Proper Operations