Machine setup costs
$ 40,500
500 batches
$81/batch
Equipment and
maintenance costs
$235,000
23,500 MH
$10/MH
Facility rent costs
$200,000
6,250 sq. ft.
$32/sq. ft.
1. Budgeted cost of unused capacity = $32 per sq. ft. (6,250 – 2,860 −2,140) sq. ft.
= $32 1,250 sq. ft. = $40,000
3.
Basic
Direct materials
$325,000
Direct manufacturing labor
110,000
Indirect manuf. labor ($110,000 and $130,000 30%)
33,000
Machine setup (300 and 200 batches $81/batch)
24,300
Equipment and maintenance costs (11,000 and
12,500 MH $10/MH)
110,000
Facility rent (2,860 and 2,140 sq. ft. $32/sq. ft.)
91,520
Total cost
$693,820
Divided by number of units
5,000
Cost per unit
$ 138.76
4. Although the excess capacity is currently costing Whitewater $40,000 annually, having excess
capacity allows for the company to accept special orders if they are received, expand production
of either of the existing models, or add a new product line in the future. Whitewater should
consider if there is available labor and machine hours before increasing production to use the space,
as well as demand for the product. Whitewater may also consider renting out the available space
to a compatible outside user, with the option to take the space back if needed.
5-41 (50 min.) ABC, implementation, ethics.
(CMA, adapted) Plum Electronics, a division of Berry Corporation, manufactures two large-screen
television models: the Mammoth, which has been produced since 2010 and sells for $990, and the
Maximum, a newer model introduced in early 2012 that sells for $1,254. Based on the following
income statement for the year ended November 30, 2014, senior management at Berry have
decided to concentrate Plum’s marketing resources on the Maximum model and to begin to phase
out the Mammoth model because Maximum generates a much bigger operating income per unit.
Total S, G, & A costs
516,903
511,265
475,666
1,503,834
Operating income
$ 546,850
$ 81,784
$(296,135)
$ 332,499
Comparing product line income statements in requirements 1 and 2, it appears that books are much
more profitable and café loses a lot more money under the ABC system compared to the simple
system. The reason is that books use far fewer S,G, & A resources relative to its merchandise
costs, and café uses far greater S, G, & A resources relative to its merchandise costs.
3.
To: Main Street Books and Café Management Team
From: Cost Analyst
Re: Costing System
The current accounting system allocates indirect costs (S,G, & A) to product lines based on the
Cost of Merchandise sold. Using this method, the S, G, & A costs are assigned 54%, 35%, 11%,
to the Books, CDs, and Café product lines, respectively.
I recommend that the organization switch to an activity-based costing (ABC) method. With ABC,
the product lines are assigned indirect costs based on their consumption of the activities that give
rise to the costs. An ABC analysis reveals that the Café consumes considerably more than 11% of
indirect costs. Instead, the café generally requires 25–35% of the purchasing, receiving, and
stocking activity and 60% of the customer support.
The current accounting technique masks the losses being produced by the café because it assumes
all indirect costs are driven by the dollar amount of merchandise sold. By adopting ABC,
management can evaluate the costs of operating the three product lines and make more informed
pricing and product mix decisions. For example, management may want to consider increasing
prices of the food and drinks served in the café. Before deciding whether to increase prices or to
close the café, management must consider the beneficial effect that having a cafe has on the other
product lines.
An ABC analysis can also help Main Street Books and Café manage its costs by reducing the
number of activities that each product line demands and by reducing the cost of each activity.
These actions will improve the profitability of each product line. ABC analysis can also be used
to plan and manage the various activities.