Neighborhood Servings Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

QUESTION 1

Compute the cost of a regular and special meal using the new overhead pools and cost drivers. What explains the differences between these costs and the ones in Exhibit 1?

The new overhead costs and their respective cost pools have been determined by Ms. Canard. The admin and general costs had been divided into three cost pools. These three cost pools were namely the purchasing costs, dieticians’ costs and the delivery costs. The respective cost driver data has also been provided in the table of the case. A cost driver is something which drives the activity and this would be not same for the regular meal and the special meal.

Previously the total costs for the regular meal and the special meal were calculated based on two overhead absorption rates, however, under the new cost accounting system called as the activity based costing system proposed by Ms. Canard, the costs for each of the meal are calculated by calculating the overhead absorption rates for each of the cost pool. Based on these overhead rates for each of the specific cost pools, the overhead costs for the regular meals and the special meals could be calculated more accurately because it would then be representing the driver of the total activity for each category of the meal.

For instance, the case states that the special meal customer receives just one meal per delivery whereas the regular meal customer receives seven meals at a time, therefore, in this regard the delivery costs for the special meals must be different and higher than the delivery costs of the regular meals. Therefore, this is incorporated into the costs of the respective meals with the help of the overhead rates for each cost pool. The cost per meal for regular meal and the special meal has been calculated by first summing up all of the direct costs which include the ingredients, packaging materials and the kitchen labor costs. The occupancy remains the same which is 20% of the total direct costs. After that instead of the single admin and general costs they have been divided into three categories.

The costs for purchasing, dieticians and the delivery have been calculated for the regular and the special meal based on the overhead rates of the three activities. The cost per meal for regular meal is $ 4.31 per meal and the cost per meal for the special meal is $ 11.58. The differences in the costs as compared to the older costs per meals shows that the company was charging the regular meal $ 2.59 per meal higher as compared to its competitors, whereas the company was charging $ 0.51 lower for the special meals and this was eroding the profits of the company and raising the concerns on the part of its customers.

QUESTION 2

What is your assessment of the overhead pools and cost drivers that Ms. Canard has chosen? How, if at all, might they be improved?

The cost pools have been created by Ms. Canard by distributing the total admin and general costs into three different cost pools which are the purchasing costs, dietician costs and the costs of delivery. These three costs are significant costs for each of the three meals and they are different for the regular meal and the special meal. However, this could not be identified by the current cost accounting system which is being used by Neighborhood Servings Company.

Ms. Canard has suggested that more time is required in purchasing the ingredients for the special meals as compared to the regular meals, therefore based on this reason the purchasing costs need to be higher for the special meals. Secondly, the dieticians have to put in more effort and spend a considerable portion of their time so that they could design the meals around the organic foods. Since the special meals are designed for a special class of people therefore, more effort and more available time of the dieticians would be consumed in designing the special meals as compared to the regular meals.

Neighborhood Servings Case Solution

Therefore, based on this the dietician costs for the special meals should be higher as compared to the dietician costs for the regular meals. Lastly, as stated before the delivery costs for the special meals also need to be higher as compared to that of the regular meals because a meal could be delivered seven times in each delivery for a regular meal delivery whereas just one time for a special meal delivery. So the delivery costs for the special meals need to be much higher than that of the regular meals..................