Essay About Different Labels And Different Cost Allocation Methods

South Dakota Microbrewery Case Analysis
South Dakota Microbrewery (SDM) – Case Study         Franco BorrelloKey Relevant InformationProduct mix: Three different labels: Ale, Stout, Bock.Market info: Ale label is sold primarily to College bars, in large shipments. Stout and Bock labels are sold to upscale restaurants, in small shipments.Market forecast: Ale label: High local competition, high price fluctuations. Bock market forecast:  Inelastic to small price changes. Low local competition and steady demand.Gross Margin (GM) target: 30% for all products.Distribution logistics is considered by SDM management as a key factor to maintain competitiveness and to grow in the future.Conclusions & RecommendationsCosting methodology: The two different cost allocation methods – Plant-wide cost allocation based on direct labor hours (LHM) and Activity-Based Costing (ABC) – provide substantial different results. These results are shown in Exhibits 1, 2a, and 2b. Due to the characteristics of SDM operations and its cost structure – three different labels, with high incidence of non-labor costs – I recommend to use the ABC method for allocating the overhead costs.Using the Cost Drivers identified by the SDM accountant, the total costs using the two different methods are (see Exhibit 3 for more information):AleStoutBockCost per bottle – LHM$ 0.85$ 0.86$ 0.91Cost per bottle – ABC$ 0.60$ 0.88$ 1.60GM per batch – ABC42.7 %37.3 %(6.9 %)Total GM$ 59,164.59$ 27,050.88($ 4,739.47)Target Price(30% GM)$ 0.78$ 1.14$ 2.08The company’s overall operating margin is 29.1%, near the management goals. The overall margin does not change if the costing method is changed.  An Income Statement for SDM (1998) is shown in Exhibit 4.Pricing for Ale label: Even if the management is concerned about the lower GM of this label, the ABC costing shows that currently this is the label with higher GM (42.7%), exceeding the management targets (see Exhibit 3). My recommendation is therefore not to change the price of this label ($1.05 per bottle). The minimum price to achieve the target for this label is $0.78 per bottle, so the company is highly protected against competition and price fluctuations.Pricing for Stout label: The GM for this label is 37.3%, therefore my recommendation is to maintain the current price ($1.40 per bottle). The minimum price per bottle to achieve the GM goals is $1.14. There is no relevant information about this label that may indicate a change of strategy.