CASE 1
Executive Summary
From the A12 redesign proposal, it shows that the current standard cost system is unable to
link the reduction in the number of parts to activity reductions and cost savings. The
labor-direct-based standard cost system reflects the cost of A12 is distorted. Using the
ABC system, according to the activities of A12 allocate the overhead cost to A12 that
could find that the current overhead cost of A12 was overstated by the standard cost
system. At last, A12 Junction Box could be identified it is an attractive and profitable
product, at the same time, it demonstrates the value of ABC.
Introduction
Alice Johnson has to make a presentation to the management team that explains how ABC
can add value to the decision-making process within Wilson Electronics. The presentation
focuses on a cost-reduction proposal as a way to demonstrate that ABC is capable of aiding
the decision-making process. This proposal is the redesign of the A12 junction box. The
current used standard cost system is unable to link the reduction in the number of parts to
activity reductions and cost saving, so it is a good chance to demonstrate the value of
Activity-based costing system.
Discussion
1.What is the ABC cross model? Define what is meant by the product costing, process
costing, and the “what-if”“ cost-modeling perspectives of ABC.
ABC cross model could provide a platform for discussing applications of ABC from
different perspective which not only a “what-if”“ cost-modeling but also both a
product-mix-strategy and a process-cost-management. Product costing is the process of
accumulating, classifying and assigning direct materials, direct labor, and factory overhead
costs to products or services. Process costing is a product costing system that accumulates
costs according to processes or departments and assigns them to a large number of nearly
identical products. “What-if”“ cost-modeling is one of the ABC model capability, it can
calculate the cost with given different levels for a factor that influences that cost. Also, it
can help Wilson electronics estimate their cost saving in each one of the support
departments with much greater certainty.
2.Estimate an income statement for the current version of the A12 junction box using the
direct-labor-based standard cost system. Compare the profitability of the current version of
the A12 junction box as reported by the direct-labor-based system to the ABC system and
relate these cost numbers to the competitor announced price reduction of $2.50 per unit.
What conclusions may be inferred from this information?
Wilson has generated approximately an annual volume of 100,000 units. While using the
