Case Study: Fine Foods
EXECUTIVE SUMMARY From the information obtained in the case study, the main problems facing Strategic Marketing Unit Two (SMU2) were:
1) the product costing system allocated cost unfairly;
2) operating profit did not reflect true performance of the unit.
It was obvious that Fine Foods needs to change the cost allocating system. They could either improve the current cost system or change to a new cost allocating system. My recommendations for Find Foods are to:
1) change to activity-based system;
2) use contribution margin 1 to evaluate performance.
INTRODUCTION
Fine Foods produced a wide range of food products in the upper Midwest United States. It was organized into three SMUs based on the markets they serve. SMU2 was the main focus of this case study; they served mostly institutional customers who order in large volumes, and also special orders. The special orders MP constituted 2% of total revenues. The advantage of MP was that it has a flexible schedule in production. In the next sections, I will explain why allocating some of the fixed production costs could be misleading for SMU2. The primary evaluation for SMUs’ performance was operating profit. At Fine Foods, operating profit was complex to calculate. As shown in table 2, Fine Foods had four contribution margins before obtaining the operating profit. In the next sections, I will explain how some costs should not be accounted to evaluate the unit’s performance.
PRODUCT COSTING & SPECIAL ORDERS In the case of Fine Foods, costs could not be traced physically through the current costing system. Most of the fixed production costs such as steam boilers, building maintenance, vehicles, and sanitation were allocated directly to products using net weight or gross weight. This was unfair to SMU2 because special order MP is a dense, bulky, and heavy product, while it