Problem 5-13A Comparing an ABC system with a traditional costing system
Peck Electronics produces video games in three market categories, commercial, home, and miniature. Peck has traditionally allocated overhead costs to the three products using the companywide allocation base of direct labor hours. The company recently implemented an ABC system when it installed computer-controlled assembly stations that rendered the traditional costing system ineffective. In implementing the ABC System, the company identified the following activity cost pools and cost drivers.
Category Total Pooled Cost Types of Costs Cost Driver
Unit $720,000 Indirect labor wages, supplies, depreciation, machine maintenance Machines hours
Batch 388,800 Materials handling, inventory storage, labor for setups, packaging, labeling and shipping, scheduling Number of production orders
211,200 Research and development Time spent by research department
Facility 600,000 Rent, utilities, maintenance, admin. Salaries, security Square footage
Commercial Home Miniature Total
Direct materials cost $36/unit $24/unit $30/unit ___
Direct labor cost $14.40/hour $14.40/hour $18/hour ___
Number of labor hours 6,000 12,000 2,000 20,000
Number of machine hours 10,000 45,000 25,000 80,000
Number of production orders 200 2,000 800 3,000
Research and development time 10% 20% 70% 100%
Number of units 15,000 45,000 14,000 74,000
Square footage 20,000 50,000 30,000 100,000
a. Determine the total cost and cost per unit for each product line, assuming that overhead costs are allocated to each product line using direct labor hours as a companywide allocation base. Also determine the combined cost of all three product lines.
b. Determine the total cost and cost per unit for each product line, assuming that an ABC system is used to allocate overhead costs. Determine the combined cost of all three product lines.
c. Explain why the combined total cost computed in Requirements a and b is the same amount. Given that the combined cost is the same using either allocation method, why is an ABC system with many different allocation rates more accurate than a traditional system with a single companywide overhead rate?
Problem 6-28A Eliminating a segment
Brandt Boot Co. sells men’s, women’s, and children’s boots. For each type of boots sold, it operates a separate department that has its own manager. The manager of men’s department has a sales staff of nine employees, the manager of the women’s department has six employees, and the manager of the children’s department has three employees. All departments are housed in a single store. In recent years, the children’s department has operated at a net loss and is expected to continue to do so. Last year’s income statements follow.
Men’s Department Women’s Department Children’s Department
Sales $600,000 $420,000 $160,000
Cost of goods sold (265,500) (176,400) ( 96,875)
Gross margin 334,500 243,600 63,125
Department manager’s salary (52,000) (41,000) (21,000)
Sales commissions (106,200) (75,600) (27,900)
Rent on store lease (21,000) (21,000) (21,000)
Store Utilities (4,000) (4,000) (4,000)
Net income(loss) $151,300 $102,000 $ (10,775)
a. Determine whether to eliminate the children’s department.
b. Confirm the conclusion you reached in Requirement a by preparing income statements for the company as a whole with and without the children’s department.
c. Eliminating the children’s department would increase space available to display men’s and women’s boots. Suppose manager estimates that a wider selection of adult boots would increase the store’s net earnings by $32,000. Would this information affect the decision that you made in Requirement a? Explain your answer.