Problem 10 - Accounting

Question

Coca-Cola Enterprises is the largest bottler of Coca-Cola in North America. The company purchases Coke \({ }^{\otimes}\) and Sprite \({ }^{-}\)concentrate from The Coca-Cola Company, dilutes and mixes the concentrate with carbonated water, and then fills the blended beverage into cans or plastic two-liter bottles. Assume that the estimated production for Coke and Sprite two-liter bottles at the Dallas, Texas, bottling plant are as follows for the month of March: \(\begin{array}{ll}\text { Coke } & 214,000 \text { two-liter bottles } \\\ \text { Sprite } & 163,000 \text { two-liter bottles }\end{array}\) In addition, assume that the concentrate costs \(\$ 80\) per pound for both Coke and Sprite and is used at a rate of \(0.2\) pound per 100 liters of carbonated water in blending Coke and \(0.15\) pound per 100 liters of carbonated water in blending Sprite. Assume that twoliter bottles cost \(\$ 0.08\) per bottle and carbonated water costs \(\$ 0.06\) per liter. Prepare a direct materials purchases budget for March 2010, assuming no changes between beginning and ending inventories for all three materials.

Step-by-Step Solution

Answer

The direct materials purchases budget for March 2010 is $183,000.

Step 1: Calculate Liters of Coke and Sprite

First, determine the total liters to be produced for both Coke and Sprite in March. Since each two-liter bottle equals 2 liters, multiply the number of bottles by 2. For Coke: 214,000 bottles x 2 liters/bottle = 428,000 liters. For Sprite: 163,000 bottles x 2 liters/bottle = 326,000 liters.

Step 2: Determine Concentrate Needed

Using the rate of concentrate required per 100 liters, calculate the total pounds of concentrate required. For Coke: 0.2 pounds per 100 liters means (428,000 liters / 100) x 0.2 = 856 pounds. For Sprite: 0.15 pounds per 100 liters means (326,000 liters / 100) x 0.15 = 489 pounds.

Step 3: Calculate Cost of Concentrate

Multiply the pounds of concentrate by the cost per pound to find the total cost. For Coke: 856 pounds x $80/pound = $68,480. For Sprite: 489 pounds x $80/pound = $39,120.

Step 4: Compute Cost of Two-liter Bottles

Calculate the cost of the two-liter bottles needed. For Coke: 214,000 bottles x $0.08/bottle = $17,120. For Sprite: 163,000 bottles x $0.08/bottle = $13,040.

Step 5: Calculate Cost of Carbonated Water

Multiply the liters of carbonated water by the cost per liter. For Coke: 428,000 liters x $0.06/liter = $25,680. For Sprite: 326,000 liters x $0.06/liter = $19,560.

Step 6: Total Direct Materials Purchases Budget

Sum the costs of the concentrate, bottles, and carbonated water for both Coke and Sprite. Coke Total Cost: $68,480 (concentrate) + $17,120 (bottles) + $25,680 (water) = $111,280. Sprite Total Cost: $39,120 (concentrate) + $13,040 (bottles) + $19,560 (water) = $71,720. Add the totals for Coke and Sprite to find the complete budget: $111,280 + $71,720 = $183,000.

Key Concepts

Direct Materials Calculation

To create an accurate budget, it is essential to calculate the exact amount of direct materials needed. For Coca-Cola Enterprises, this involves assessing how much concentrate, two-liter bottles, and carbonated water are required for the production of Coke and Sprite.

• **Concentrate Calculation**: We start by determining how much concentrate is required. The rate for Coke is 0.2 pounds per 100 liters of carbonated water, while Sprite requires 0.15 pounds per the same amount. Knowing these rates, you calculate the total pounds needed based on the output.


• **Bottle Calculation**: Each beverage is poured into two-liter bottles, and so you need to determine how many bottles you'll need. Since each liter translates directly to a physical bottle, multiplying the number of bottles by the individual cost of $0.08 is straightforward.


• **Carbonated Water Calculation**: The production of each beverage also depends on carbonated water. The calculation uses the direct connection between the total liters of each drink and the required water. This step ensures you have accounted for every potential cost properly.

By breaking down these calculations, producers can build a sound structure for their budget.

Budgeting in Accounting

Budgeting is a critical aspect in accounting that helps businesses anticipate future needs and ensure financial stability and sustainability. The direct materials purchases budget is an essential component of this process.

• **Purpose of Budgeting**: Budgets forecast expenditure, facilitating decision-making by predicting what's needed in the future and preparing for it. This allows a business to allocate funds efficiently and prevent overspending or deficits.


• **Role of Direct Materials Budget**: Specifically, a direct materials budget ensures that there are enough raw materials for production. It considers each element separately to ensure accuracy and completeness. For Coca-Cola, this means carefully calculating the concentrates, bottles, and carbonated water needed for their beverages.


• **Financial Control**: By creating a detailed materials budget, companies also enforce financial discipline. It becomes easier to track performance against the set plan, ensuring that operations stay within financial constraints.

Overall, budgeting is a tool for ensuring that all necessary materials are available for production without diverting resources from other areas.

Cost Analysis

Analyzing costs is a vital step towards understanding how different components of production impact the total expenses. Techniques like cost analysis break down these expenses into smaller, more manageable parts.

• **Understanding Costs**: For Coca-Cola, understanding costs means evaluating the concentration cost, the number of bottles, and the carbonated water required. Each of these components has a distinct price that influences the total cost.


• **Components of Cost**: Breaking down costs into components helps managers understand which parts of the operation are most expensive. For example, concentrate costs are calculated by the pounds used, whereas bottles have a fixed unit price. Water costs depend on the total liters used.


• **Evaluating Efficiency**: Regular cost analysis allows companies to assess the efficiency of their operations and decide where improvements can be made. By knowing precise costs, businesses can strategize and optimize spending to improve profits and operational efficiency.

In conclusion, cost analysis not only involves calculating costs but interpreting them to improve economic performance and strategic planning.