Dream chocolate company choosing a costing system

ISSUES IN ACCOUNTING EDUCATION American Accounting Association Vol. 28, No. 3 DOI: 10.2308/iace-50464 2013 pp. 637–652

Dream Chocolate Company: Choosing a Costing System

Kip R. Krumwiede and W. Darrell Walden

ABSTRACT: This case is about a small, but real, company, Dream Chocolate (D.C.), which makes custom-labeled, high-quality candy bars for special events and advertising purposes. Like many small companies, D.C. has an inadequate costing system and needs a much better one as it starts to get bigger orders. In Part A of this case, students learn how to analyze a company’s situation, identify relevant information in a case that is presented in a less-structured format, evaluate the pros and cons of different costing approaches, recommend an approach, and suggest ways to implement it. In Part B, they develop and calculate costs based on their recommended approach. The case also helps increase students’ understanding of the applicability of various costing methods typically covered in cost and managerial accounting courses.

Keywords: instructional case; cost accounting; job order costing; process costing; operation costing; activity-based costing; and accounting information systems.

INTRODUCTION

K ay Johnson sat back in his chair wondering about what he had just done. He accepted a

special order from a national supplier of wellness products for 200,000 chocolate bars at a

20 percent discount from the usual price. It is a new type of bar and the company provided

the recipe. The company also hinted about a second order for 150,000 bars if the first order was

successful. Kay sighed and thought, ‘‘I hope we can make a profit on this order, because we are going to have to increase our capacity big-time to fill it. Wish I knew what the cost will be.’’

OVERVIEW OF COMPANY

Dream Chocolate (D.C.) is the major product line of Salmon River Foods, the spawn of a trip

on the Middle Fork of the Salmon River in Boise, Idaho. President Kay Johnson was burned out by

30 years in the food service industry and decided to sell his business and begin anew. Quite by

accident, he received a call asking if his new company Salmon River Foods would consider selling

Kip R. Krumwiede and W. Darrell Walden are both Associate Professors at the University of Richmond.

We thank David E. Stout, Shannon L. Charles, and Nick Fessler for helpful comments. We also thank Kay Johnson, owner of Dream Chocolate, for his support throughout the project.

This case is based on a real company, but quantitative information used in the case is disguised for confidentiality purposes.

Published Online: March 2013

637

chocolate bars. Kay’s son Rob was employed by a German company and was frequently flying to

Europe and returning with wonderful chocolate as family gifts. Kay wondered how he could

produce European-style chocolate (no waxes or preservatives) in the U.S. With his son’s help, he

found a supplier in Germany who would ship to the U.S. Kay purchased a chocolate factory in

Boise and began production in April 2002. Kathleen Wasson, Vice President, oversees the creative

arts department and assists Kay in managing the plant.

What started with one basic milk chocolate bar has grown to include two milks, two darks, two

semi-sweets, one white, one bittersweet, and other adaptations involving various ingredients such as

coffee, berries, and fresh mint. The chocolate is wonderful, but the real charm of the product is its

custom labeling. For individual snacking, D.C. bars are sold in specialty markets, fine gift stores,

and other locations. They are also available for corporate events and celebrations, such as weddings

and birthdays. The website at www.dreamchocolate.com provides more information about its

various product offerings.

Competitive Pressures

D.C. is a small company trying to survive in an industry with many players. Competition can

come from the many custom chocolate bar providers on the Internet (e.g., Custom Candy

Creations, Totally Chocolate, Carson Wrapped Hershey’s Chocolates, to name a few), as well as

from big chocolate companies (e.g., Mars, Nestlé, and Hershey’s) who can always beat D.C. on

price. As such, it pursues any type of order it can get. The company’s niche is European-style

custom chocolate bars and labeling, and it is known for its flexibility and speed. For instance, a

small customer order can be printed, labeled, and ready for pickup or shipping within an hour if

the company already has the label in its system. Few, if any, of D.C.’s competitors can match

this turnaround time or its combination of high-quality bars, variety of flavors, and custom

labeling.

Lagging Sales

Sales were about $500,000 in 2010. Demand was increasing in August and September 2010,

which are normally weaker months due to fewer special events. This gave D.C. management great

hope, but the continued national recession hurt sales in 2011 (as it did for most companies). When

asked about the issues D.C. faced at that time, Kay Johnson said that:

We need more business to utilize our capacity and make a profit. As we do so, the main

issue will be training people. It takes up to three months to train people adequately. Also,

custom labeling needs to be more effectively marketed. This is our best margin area. If we

focused our business on low-margin, high-volume chocolate bars we could be vulnerable

to customers dropping us for another supplier.

Costing Issue

It is now 2012 and D.C. is starting to get bigger orders, such as the one for 200,000 bars.

D.C. bars are also now being sold in some REI1 outlets around the country. As is common with

small companies, Salmon River Foods has an inadequate costing system. For example, it is

unable to compute actual costs per order or per bar. For pricing purposes, Kay estimates the

costs of each type of bar using his experience and knowledge of ingredient prices and what he

pays out each month in expenses. Each order is different, and typically ranges from 150 bars to

1 REI is a national retail chain of outdoor clothing and equipment products (see: www.REI.com).

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http://www.dreamchocolate.com
http://www.REI.com
10,000 bars. It is difficult for the company to estimate an accurate cost for an order for pricing

purposes, so he really never knows whether orders are profitable or not. Kay wondered how to

accurately determine the cost for this new special order—the biggest order in the company’s

history by far!

Adding to the challenge are limited resources for more accounting work. D.C. employs an

hourly wage Boise State University accounting graduate part-time to do its monthly bookkeeping

(books are closed at the end of the year). A local CPA does its financial statements, taxes, and

provides occasional advice. However, Kay now needs a new type of costing system to provide

accurate cost estimates, and is wondering what type of costing system makes sense for his small but

growing business.

PRODUCTION PROCESS

Making high-quality chocolate bars is a challenging process. The bulk chocolate must be

melted and flavored just right before being tempered, which is a process that aligns the crystals in

molten chocolate to produce the best texture balance of firm and creamy. Kay Johnson described

the challenges in achieving the right formula:

It’s a high-end process. The chocolate is temperamental, and, much like wine, there are

many different kinds, qualities, and layers of flavor. We try to make ours less sugary and

more pure, so that chocolate is the first thing you taste.

D.C. employs a full-time Master Chocolatier, who oversees the entire production process, fills

in at any area when there is a need, and performs most of the product inspections. Exhibit 1

provides a flow chart of the 3,000 square foot factory and the seven production areas, each of which

are discussed next.

1. Receiving Area

As soon as the bulk chocolate is received in the Receiving Area, it is dated and placed in the

Imported Chocolate Storage area. Organic chocolate, which comes from a U.S. supplier, has a

separate shelf from the rest of the bulk chocolate.

2. Pouring Area

After the Pouring Area is cleaned and cleared of all non-organic chocolate (if necessary), the

bulk chocolate is brought to the melting pots to be melted. Any flavors (e.g., mint or lavender oil)

and ingredient additives (e.g., huckleberries or nuts) are added to the pots at the right time. This

process consists of tempering and pouring the chocolate into molds, then moving the molds to the

Cooling Tower. There are separate racks for organic and non-organic bars.

3. Inspection Area

Bars are taken out of the molds on the Chocolate Breakdown Table, and the newly formed chocolate

bars are placed on a rack in the Inspection Area. In the Inspection Area, the Master Chocolatier weighs

the bars and visually inspects each one for flaws. Flawed bars are sent back to the Chocolate Rework

Storage area to be re-melted and used again. There is very little waste in the process and no by-products.

4. Foiling Area

After the chocolate is inspected, it is sent to the Foiling Area to be manually foiled. After

foiling, the chocolate bars are either sent immediately to the Labeling area to be completed as ‘‘retail

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stock’’ or put on the Foiled Product shelves to be held for future orders as ‘‘bright stock.’’ D.C. likes to keep bright stock on hand to be able to quickly fill future orders for the more common sizes and

flavors. Bright stock boxes are dated and used based on first-in first-out (FIFO).

5. Labeling Area

In the Labeling Area, foiled chocolate bars are manually labeled and prepared for shipping.

Some retail stock orders are labeled with standard, pre-designed D.C. labels describing the flavor,

type of chocolate, and possibly a theme (e.g., ‘‘The Wine-Lovers Bar’’ or ‘‘Think Pink Dark Chocolate’’). Other orders are for ‘‘Custom Label Bars’’ for advertising or special events (e.g., weddings, store openings). These labels include things like company logos, photos, paintings, and

even resumes and personal business cards. D.C. requires a 150-bar minimum and charges an

additional amount for the custom label design costs, which can vary significantly depending on

customer needs. VP Kathleen Wasson edits the many retail and custom labels produced for D.C.

bars. All labels are printed on D.C.’s color laser printer.

6. Finished Product Storage Area

All labeled bars are stored in the Finished Product Storage Area until shipped or picked up by

customers. The company produces significant varieties of both bright stock and retail stock. There

are approximately 40-plus different flavor and size variations of bright stock in storage. The retail

stock has even more types of bars for different retail clients.

EXHIBIT 1

Salmon River Foods/Dream Chocolate Floor Plan

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7. Shipping Area

The bars are invoiced, packed, and shipped out to the customer FOB shipping point. If deemed necessary, the bars are packed in insulated material with a cold pack to prevent melting.

PRODUCT INFORMATION

D.C. sells many types of bars, with varying sizes, ingredients, and flavors. Although there are

other sizes available, D.C. typically sells bars in three standard sizes: 1.25 oz. (both organic and

non-organic), 3.0 oz. (non-organic only), and 3.25 oz. (organic only). This section describes the

ingredients, labor, and overhead required to make its bars.

Materials

Table 1 provides typical prices and costs of chocolate for the standard-sized bars. The bulk

chocolate is generally from German suppliers, but D.C. also has a U.S. supplier of high-quality

chocolate. Chocolate prices can vary, due largely to unstable conditions in major cocoa bean-

producing nations such as the Ivory Coast. Standard chocolate bars, with no additional flavors or

special ingredients, comprise about half (47 percent) of total sales. Besides chocolate and other

ingredients, the product cost includes the foil and label. Table 1 provides the typical costs for these

items.

Bars can have one or more types of special flavors and ingredient additives, such as the recent

order from the wellness company. The additional costs for these additives are handled in different

ways. Flavor additives are a relatively small part of the overall weight of the bar, and primarily

affect the taste of the chocolate itself. Bars with higher-cost flavor additives, such as coffee and

Kava, comprise about 13 percent of sales. These ingredients are added to the pot and listed as an

ingredient with a direct cost (e.g., $8 for two pounds of coffee used in a batch). Less expensive

additives, such as flavoring oils (e.g., mint or lavender), are not included in direct costs as a little

goes a long way. These costs usually show up in overhead. Sixteen ounces of oil cost about $22,

and D.C. uses only two ounces for a batch of 1,200 1.25-oz. bars. About 16 percent of product sales

have these flavoring oils.

‘‘Stir-in’’ ingredients are a relatively larger part of the weight of the bar, are clearly noticeable in the final bar, and affect the overall taste of the bar rather than the chocolate itself. Bars with stir-in

ingredients, such as huckleberries and all nuts, comprise about 24 percent of sales and add

additional direct materials and direct labor costs. Kay estimates $12 per pound average for nuts,

TABLE 1

Typical Prices and Costs of Chocolate

1.25 oz. Bar 3.0 oz. Bar 3.25 oz. Bar

Price Per Bar � Non-Organic $1.40 $2.40 NA � Organic $1.50 NA $2.55

Cost of Chocolatea � Non-Organic $0.18 $0.44 NA � Organic $0.33 NA $0.83

Cost of Foil $0.03 $0.06 $0.06

Cost of Label $0.03 $0.08 $0.08

a Does not include additional flavors or ‘‘stir-in’’ ingredients.

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ginger, and huckleberries, and these ingredients become about 5 percent of the finished weight of

the bar. In addition to the direct materials cost for these ingredients, there is additional labor

required for stirring to achieve equal distribution throughout the bar.

Direct Labor

Four of the seven production areas have labor costs that should be included in product cost.

Direct labor comes from pouring, inspecting, foiling, and labeling. Table 2 provides the average

labor rates (including benefits) and estimated average number of bars that can be processed in each

of the four labor areas. Notice that larger bars can be inspected twice as fast as the smaller bars. The

reason is that larger bars have fewer defects, so less time is needed. Because each area might be

working on multiple customer jobs at a time, it is difficult to track labor hours for each customer

order.

The extra labor cost for ‘‘stir in’’ ingredients is handled in one of two ways. If performed by the Master Chocolatier, whose salary is included in plant overhead cost, Kay considers it as no

additional direct cost. If the Master Chocolatier is busy and other workers will be required, Kay

adds $12.50/hour of labor to each stir-in batch when estimating the cost of a job.

Overhead Costs

Overhead costs include administrative costs, supplies, three salaried employees (including

Kay, Kathleen, and the Master Chocolatier), an hourly wage customer service person, and lease

payments for the building. Table 3 provides a breakdown of budgeted overhead costs per month of

$19,800, on average. Note that each production area incurs costs for supplies each month.

Capacity and Output

Currently, the factory can pour up to about 300 pounds of 1.25-oz. chocolate bars per eight-

hour day. Different bar sizes can be produced in the same batch. However, as is usually the case,

total factory output is constrained by bottleneck processes, number of qualified workers, and

customer demand. Current budgeted production is 25,000 1.25-oz. bars and 1,000 3.0/3.25-oz. bars

per month, with an estimated average order size of 200 bars. Typically, two-thirds of production is

for organic bars. Kay tries to batch all the non-organic batches together and only switch from

organic to non-organic once a month (there is no difference in setup time between the two types).

There are typically two days of production in work-in-process between the pouring and foiling

areas because that is how long it takes to make and foil the bars.

Kay is optimistic that D.C. can produce the additional 20,000 to 25,000 bars per month needed

for the big special order, but he will need additional equipment and trained workers. He will also

TABLE 2

Average Labor Rates and Capacity Volumes by Labor Area

Area Labor Rate/Houra 1.25 oz. Bar 3.0 oz. Bar 3.25 oz. Bar

Pouring $15.40 480 bars/hour 200 bars/hour 184 bars/hour

Inspecting $11.00 240 bars/hour 480 bars/hour 480 bars/hour

Foiling $9.90 175 bars/hour 175 bars/hour 175 bars/hour

Labeling $9.90 175 bars/hour 175 bars/hour 175 bars/hour

a Includes payroll taxes and benefits.

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need to add an extra shift, but he must train additional workers first. Training can take up to two

months to be able to meet D.C.’s high standard of quality.

Kay’s Cost Estimates

Table 4 shows how Kay estimates the cost of standard types of bars. When Kay estimates costs

to price a typical order, he adds materials (including ingredients, foil, and label), direct labor, and

overhead costs per bar to get the total estimated cost per bar. For overhead, he allocates $0.69 per

bar based on producing at the bottleneck rate and assuming an average of 20.5 work days per

month, one eight-hour shift per day, and one worker per labor area. Markup percentages vary and

are affected by the size of the order and demand. When customers want a significant discount from

the normal price, he will usually decline unless there is a good chance of future business. He

accepted the big order because of the high volume and prospect for more large orders.

ACTION ITEMS

Now put yourself in Kay Johnson’s shoes and think about what type of costing approach will

help you determine more accurate products costs for pricing different orders, like the recent big

order. In Part A, you will analyze D.C.’s situation, identify its information needs, evaluate the pros

and cons of different costing approaches, recommend an approach, and suggest ways to implement

it. If your instructor assigns Part B, you will calculate product costs based on your recommended

approach.

Part A: Choosing a Costing System

A1: What Information Does D.C. Need?

Before recommending a cost system, it is helpful to understand the cost information needs of

the company. Based on case information, briefly summarize D.C.’s competitive environment and its

apparent strategy in response to that environment. Considering the company’s strategy and

products, what types of cost information should D.C.’s product costing system be able to provide?

A2: Which Costing Approach(es) Do You Recommend?

a: Discuss the pros and cons of the different costing approaches available to D.C., including

job order costing, process costing, operation costing, and activity-based costing.

TABLE 3

Budgeted Monthly Overhead Cost Breakdown

Cost Item Amount

Admin. Costs $1,000

Production Area Supplies 3,800

Salaries 10,000

Customer Service 3,000

Lease Payments 2,000

Total Budgeted Overhead Costs $19,800

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TABLE 4

How Kay Estimates Cost and Profitability Per Bar

Panel A: Compute Estimated Materials Costs Per Bar

Material 1.25 oz. 3.0 oz. 3.25 oz.

Non-Organic Chocolate $0.18 $0.44 NA

Organic Chocolate 0.33 NA $0.83

Foil 0.03 0.06 $0.06

Label 0.03 0.08 $0.08

Total Non-Organic $0.24 $0.58 NA

Total Organic $0.39 NA $0.97

There would be additional costs for certain flavor additives.

Panel B: Compute Estimated Labor Costs Per Bar (Labor Rate 4 Bars Per Hour from Table 2)

Labor Area 1.25 oz. 3.0 oz. 3.25 oz.

Pouring Area $0.03 $0.08 $0.08

Inspection Area 0.05 0.02 0.02

Foiling Area 0.06 0.06 0.06

Labeling Area 0.06 0.06 0.06

Total Labor Cost Per Bar $0.20 $0.22 $0.22

Panel C: Compute Estimated Overhead Cost Per Bar

Total Overhead Costs $19,800

Bottleneck Bars/Hour 175.0

Hours/Day 3 8.0 Avg. Work Days Per Month 3 20.5

Capacity Volume Per Month 4 28,700

Overhead Cost Per Bar $0.69

Panel D: Compute Estimated Profitability Per Bar

1.25 oz. Organic

1.25 oz. Non-Organic

3.0 oz. Non-Organic

3.25 oz. Organic

Price Per Bar $1.50 $1.40 $2.40 $2.55

Cost Per Bar

Total Materials Costa 0.39 0.24 0.58 0.97

Total Labor Costa 0.20 0.20 0.22 0.22

Overhead Cost Per Bar 0.69 0.69 0.69 0.69

Total Cost Per Bar $1.28 $1.13 $1.49 $1.88

Profit Per Bar $0.22 $0.27 $0.91 $0.67

Profit Percentage 14.7% 19.3% 37.9% 26.3%

a Additional costs required for certain flavor additives.

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b: Based on your analysis of costing approaches, which approach do you recommend D.C. use

for direct costs? What about indirect costs? Provide support for your recommendation. Keep in mind it is a small company with limited staff and they do not currently track actual

cost information during production. The approach should also be flexible enough to handle

high-volume or low-volume months.

c: Discuss how you would handle different types of special ingredients, stir-ins, or labeling

design costs for the new special order from the wellness company. You do not need to state

how you would handle each specific ingredient.

A3: Summary and Implementation

Summarize your recommended costing approach and discuss how it will help Kay determine

more accurate products costs for pricing different types of orders. What specific steps would you

take to implement the new product costing approach? Hint: think about what new information

would need to be collected and how you would collect it.

Part B: Calculate Product Costs

B1: Compute New Standard Product Costs

a: D.C. does not currently track actual cost information, but Kay has estimated some additional

production data provided in Table 5. Using the approach(es) you recommended in Part A

and the estimated data provided in Tables 1–5 and the Case, use Excel to compute estimated

total cost, profit margin, and margin percentage for each of the four jobs identified in Table

5, Panel A.

b: Compare your costs and profitability per bar to Kay’s estimates in Table 4. What is the

potential financial impact of using your method instead of Kay’s?

B2: Special Order

a: Starting with your standard bar costs from part B1, compute the estimated cost per bar for

the new special order from the wellness products supplier for 200,000 1.25-oz. organic

chocolate bars. The bars will have special stir-in ingredients that Kay estimates will cost

about $10 per pound, and these ingredients will become about 7 percent of the finished

weight of the bar. The additional labor required for stirring in these ingredients is estimated

to be 10.5 hours at $12.50/hour for each batch of 10,000 bars.

b: Compare your estimated cost per bar for the special order with the price, which is at a 20

percent discount off the normal price for these types of bars of $1.75. Will Kay make a

profit on this order?

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TABLE 5

Additional Estimated Data for Part B

Panel A: Job-Specific Information

Job 1 1.25/Org.

Job 2 1.25/Non-Org.

Job 3 3.0/Non-Org.

Job 4 3.25/Org.

Other Jobs

Total Month

No. of Bars 10,000 5,000 200 300 10,500 26,000

Cost of Chocolate $3,135 $945 $84 $274 $3,162 $7,600

Cost of Foil 274 133 11 18 374 810

Cost of Label 347 163 16 21 283 830

$3,756 $1,241 $111 $313 $3,819 $9,240

Panel B: Beginning Work-In-Process (BWIP), Direct Labor (DL), and Overhead (OH) Costs Added (Per Month)

BWIP- Materials

BWIP- CC

DL Added

OH Added

Total Added

Pouring/Inspection $1,550 $757 $2,348 $1,800 $4,148

Foiling $0 $0 $1,430 400 1,830

Labeling $0 $0 $1,016 1,400 2,416

Total Area Costs Added $3,600a $8,394

Other Overhead Costs

Supplies $200 $200

Admin. Costs 1,000 1,000

Salaries 10,000 10,000

Customer Service 3,000 3,000

Lease Payments 2,000 2,000

Total Other Overhead $16,200b $16,200

Total Costs Added $1,550 $757 $4,794 $19,800 $24,594

a Represents supplies costs traced directly to labor areas. b Represents other overhead costs that cannot be directly traced to labor areas.

Panel C: Expected Monthly Production Volume (in Bars)

Type of Production Total Bars 1.25 oz. 3.0/3.25 oz. EWIP

% Comp.

Beginning WIP in Pouring/Inspection 3,000 2,500 500

Bars started in Pouring/Inspection 26,000 25,000 1,000

Bars completed in Pouring/Inspection 27,000 26,500 500 50%

Bars Foiled 26,600 26,125 475 0%

Bars Labeled (assume 25 percent bright stock) 19,950 19,594 356 0%

(continued on next page)

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TABLE 5 (continued)

Panel D: Activity-Based Information

Activity Actual

Amount Level Driver Actual Volume

Area Supplies $3,600 Unit-level Trace to areas

Setting Up Melting Pots 2,000 Batch Setups 100.0

Purchasing 2,000 Batch Purchase orders 80.0

Filling Orders 6,300 Customer # Orders 500.0

Designing Labels 4,000 Customer Design hours 40

Facility-Related Costs 1,900 Facility Square feet 3,000

Total Overhead Costs $19,800

Panel E: Area-Specific Activity

Pouring Inspection Foiling Labeling Total

Purchase Orders 60 0 4 16 80

Square Feet 750 750 750 750 3,000

Panel F: Job-Specific Activity Volumes

Activity Job 1

1.25/Org. Job 2

1.25/Non-Org. Job 3

3.0/Non-Org. Job 4

3.25/Org.

Setups 10 5 1 1

Design Hours 5.0 4.0 2.0 2.0

Labor Hours

Pouring 22.00 11.00 1.00 1.75

Inspection 45.00 23.00 0.50 0.75

Foiling 58.00 29.00 1.20 1.75

Labeling 58.00 29.00 1.20 1.75

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CASE LEARNING OBJECTIVES AND IMPLEMENTATION GUIDANCE

Learning Objectives

The Dream Chocolate (D.C.) case helps meet Association to Advance Collegiate Schools of

Business (AACSB) assurance of learning standards (AACSB 2003) and common business school

learning goals. The case provides information about a small company with an inadequate costing

system in an unfamiliar, less-structured format. In Part A, students are asked to analyze the case

situation, critically evaluate the advantages and disadvantages of various costing approaches,

recommend an appropriate one, and suggest ways to implement it. In Part B, students apply their

recommended costing approach and learn to identify case information that is relevant to that

approach.

There are six primary learning objectives of the case. After completing the case, students

should be able to do the following (linked to action items in case):

Develop Unstructured Problem-Solving Skills

1. Analyze a company’s competitive environment, strategy, and products to determine what a

costing system should be able to do (linked to Part A action item A1).

2. Assess a less-structured case situation and recommend a costing approach for both direct

and indirect costs (linked to Part A action items A2b and A2c).

3. Suggest ways to implement a costing system at a small company (linked to Part A action

item A3).

Improve Technical Accounting and Business Knowledge and Critical Thinking Skills

4. Critique the strengths and weaknesses of various costing approaches for a given situation

(linked to Part A action items A2a and A2b).

5. Calculate product costs using multiple costing methods (linked to Part B action items B1a

and B2a).

Develop Written Communication Skills

6. Communicate analysis for Parts A and B in a professional, clear, and concise manner

(linked to all action items).

There are several benefits to using this case. It provides an excellent direct measure of student

comprehension and performance in an intermediate-level cost or managerial accounting course at

the undergraduate or graduate level. A grading rubric has been developed to measure various

learning goals relating to written communication, unstructured problem solving, and technical

accounting and business knowledge. The case may be assigned either as an individual or group

writing assignment or for in-class discussion (or both).

The unfamiliar, less-structured format of this case helps students identify case information that

is relevant to different costing methods and analyze that information in the context of a specific

company situation. A similar approach was used in Reisch and Seese (2005). There have been

relatively few product-costing cases of any kind, especially in recent years, and even fewer of them

provide a less-structured case situation with an inadequate existing cost system that asks students to

recommend a cost approach. For example, Kaciuba and Siegel (2009) provide an activity-based

costing (ABC) model developed for indirect costs, and ask students to analyze costs and cost

drivers and add both revenues and direct costs to the model to assess physician practice

profitability. Barton et al. (2005) have students analyze different costing approaches used in a

predatory pricing lawsuit and determine which is most appropriate. Caplan et al. (2005) ask

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students to analyze cost information and determine which of two approaches would be most useful

in a production-line changeover decision.

Another unique aspect of this case is that it can be effectively used to introduce operation

costing to students. Operation costing combines process costing for common costs and job order

costing for costs that vary by job or batch. Coverage of operation costing has typically been light in

textbooks (e.g., Horngren et al. 2009, 627; Blocher et al. 2010, 103), curriculum, and in the

literature, and we have found no instructional cases relating to operation costing. Further, in

practice, firms rarely use pure process costing as described in accounting textbooks (Dosch and

Wilson 2010). First, companies use standard costs rather than actual costs due to timeliness and

consistency. They typically use variance analysis at the end of a reporting period to compare raw

material prices and usage, direct labor, and overhead. Cost of goods sold is computed by

multiplying standard costs per unit by actual units sold. Second, real process costing systems are

often much more complex, with many different material inputs and levels of labor. For example,

food producers and other firms with more homogenous products tend to use a form of operations

costing to handle the variations in flavors, ingredients, raw materials, etc., that are prevalent today.

The prevalent use of operation costing is cited by Skinner (1978), and a good example is found in

Lee and Jacobs (1993). The teaching notes provide a review of various costing systems that

includes a discussion of operation costing and a demonstration problem that can be used to show

how operation costing works if needed.

Finally, it is a good case for showing the pros and cons of activity-based costing. The ABC

solution shows significantly different costs than the other methods. As is often the case, it shows

that the high-volume smaller bars are being overcosted, while the low-volume larger bars are being

undercosted. This result is common for ABC cases. However, there are two important differences

with this case. First, the ABC solution is compared to several other potential costing solutions,

including job costing, process costing, and operation costing. Students see firsthand why the ABC

results are opposite what the other methods show. Second, it shows that ABC is a lot more work

than the other methods and not always feasible. In the case, the small company lacks the human

resources to do ABC analysis. However, the teaching notes discuss some ways that the findings of

the ABC solution can still be used to improve the simpler approach.

Implementation Guidance

The case setting of a candy bar maker has the advantage of being a familiar product that most

students would like to try. It helps to order some samples from D.C. (see: www.dreamchocolate.

com) ahead of time and let students try them when you hand out the case. This gives them a

firsthand view of the different labels and varieties available to D.C. customers. PowerPoint slides

for the case and pictures of the factory and Kay Johnson add to the realism of the case situation and

are available from the authors.

This case is unusual in that it requires students to both recommend a costing approach and use

that approach to compute product costs. The case is best used after students have been introduced to

various costing approaches, especially job order costing, process costing, and activity-based

costing. These topics are typically covered in standard cost or managerial accounting textbooks.

However, it may be helpful to review how these costing systems differ and their relative strengths

and weaknesses before assigning the case. It may also be helpful to introduce operation costing,

which is not typically covered much in textbooks or curriculum. Another option is to assign the

article ‘‘Product Costing Systems: Finding the Right Approach’’ (Fisher and Krumwiede 2012) as a

helpful guide for making various product costing choices. The case experience will enhance their

understanding of when these various costing systems might be most appropriate.

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http://www.dreamchocolate.com
http://www.dreamchocolate.com
Student Feedback

The case has been successfully used in undergraduate cost accounting courses and two

different graduate courses at three different universities by three different professors. Anonymous

surveys were conducted of students in undergraduate and M.Acc. courses following the completion

of the written case analysis and class discussion. Thirty-six undergraduate (UG) students and 82

M.Acc. students answered the questions (see Table 6). The UG class was at a selective private

university and consisted of students with the following demographics: 28 percent female, 70

percent accounting majors, average GPA of 3.22, and average age of 21.7. The M.Acc. class was at

a different private university and taught by a different professor (not one of the authors). Eighty-

three percent of the UG students and 67 percent of the M.Acc. students felt the case increased their

understanding of managerial/cost accounting (question 9). Eighty-one percent of the UG students

and 67 percent of the M.Acc. students considered it to be a positive learning experience (question

10). Ninety-four percent of the UG students and 79 percent of the M.Acc. students felt the case

encouraged them to think critically about a company’s operations and the costs associated with

them (question 11).

As shown in Table 6, the mean scores for the UG students were statistically less than 3.0

(neutral) for all but one question, showing that the learning objectives were met. Students generally

agreed with all of the statements except question 5, ‘‘This case was easy to understand.’’ Question 5

is closely related to question 9, ‘‘This case was challenging.’’ Many students rate less-structured

cases and problems to be harder to understand and complete than structured textbook problems.

Deciphering the case information is intended to be part of the learning process. In addition, Table 6

TABLE 6

Analysis of Learning Assessment Questions about the Dream Chocolate Case

Question

UG Course Fall 2009 (n ¼ 36) Meana

M.Acc. Course Fall 2010 (n ¼ 82) Meana

1. This case helped me learn how to evaluate

different costing approaches for a given company

and recommend one.

1.75*** 1.99***

2. This case improved my ability to articulate my

accounting knowledge and analysis in a written report.

1.69*** 2.35***

3. This case was realistic. 1.67*** 2.06***

4. This case was interesting. 2.25*** 2.16***

5. This case was easy to understand. 2.97 2.73*

6. This case increased my overall understanding of

managerial/cost accounting.

2.11*** 2.37***

7. This case was a positive learning experience. 2.11*** 2.39***

8. This case encouraged me to think critically about

a company’s operations and the costs associated with them.

1.69*** 2.16***

9. This case was challenging. 1.28*** 1.94***

*, *** Indicate probability , 0.05 and 0.001, respectively, that the mean is equal to 3.0 (neutral) (two-tailed test). a Scored as 1 ¼ strongly agree, 2 ¼ agree, 3 ¼ neutral, 4 ¼ disagree, and 5 ¼ strongly disagree.

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Issues in Accounting Education Volume 28, No. 3, 2013

shows the mean scores for the M.Acc. students, which were statistically less than 3.0 (neutral) for

all questions.

In addition, many students provided written comments (mainly positive) in response to the

open-ended question, ‘‘Overall, what did you like about the case? What could be improved?’’ The following are representative of the students’ comments:

� ‘‘I like how it made us think about all approaches to how [to] cost the company.’’ � ‘‘It put all we learned in class into practice and made me realize how important the

information we are learning.’’ � ‘‘I thoroughly enjoyed using what I had learned in the classroom in order to solve a real-

world problem. This opportunity gave me a clear idea of what managerial accounting looks

like in a real company.’’ � ‘‘It was interesting and fun.’’ � ‘‘I enjoyed the case as it allowed us to analyze a real problem within a company.’’ � ‘‘Great assignment.’’

On other hand, some students expressed their discomfort with the less-structured nature of the

case, especially not having all the data needed and not understanding how the various costing

systems differ:

� ‘‘I think the case could have used more structure and guidelines for developing a cost [system].’’

� ‘‘I would like to know more about the company and historical trends of its finances.’’ � ‘‘It would have been easier if there had been more data and less of a need to make

assumptions.’’

Based on this feedback, we now emphasize in the case that D.C. is a small company with

limited staff and does not track actual cost information during production. The teaching notes also

emphasize the importance of reviewing the various costing methods and how they differ. We have

also reorganized case information to make it more accessible. Previously, the case included a

research component plus a technical action item to ‘‘make up’’ some data and compute product costs using their recommended approach. Now, Table 5 in Part B provides the needed estimated

data to provide more consistency in cost calculations for each costing method.

There will be students who are uncomfortable with this case because they want to be told what

costing approach to use. An important purpose of this case is to give students a more realistic

‘‘engagement’’ experience with a small firm that does not know what type of costing system it needs, nor does it collect the data it needs to implement it. Instructors who use this case may want to

emphasize these points to their students.

TEACHING NOTES

Teaching Notes are available only to non-student-member subscribers to Issues in Accounting Education through the American Accounting Association’s electronic publications system at http:// aaapubs.org/. Non-student-member subscribers should use their usernames and passwords for entry

into the system where the Teaching Notes can be reviewed and printed. Please do not make the

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If you are a non-student-member of AAA with a subscription to Issues in Accounting Education and have any trouble accessing this material, then please contact the AAA headquarters office at info@aaahq.org or (941) 921-7747.

Dream Chocolate Company: Choosing a Costing System 651

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REFERENCES

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costing methods in a predatory pricing lawsuit. Issues in Accounting Education 20 (4): 341–357. Blocher, E. J., D. E. Stout, and G. Cokins. 2010. Cost Management: A Strategic Emphasis. 5th edition. New

York, NY: McGraw-Hill/Irwin.

Caplan, D., N. D. Melumad, and A. Ziv. 2005. Activity-based costing and cost interdependencies among

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environment. Strategic Finance (Aug.): 37–43. Fisher, J. G., and K. Krumwiede. 2012. Product costing systems: Finding the right approach. Journal of

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