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5-74
PROBLEM 5-66 (CONTINUED)
PROBLEM 5-67 (45 MINUTES)
1. Customer-profitability profile (supporting details in the table following the profile):
Cumulative Operating Income as a
Percentage of Total Operating Income
120%
5-75
PROBLEM 5-67 (CONTINUED)
Supporting details for customer-profitability profile:
Customer
Numbera
Customer
Operating
Income
Cumulative
Operating
Income
Cumulative
Operating
Income as a
Percentage of
Total
Operating
Income
(1)
Network-All, Inc.
$186,000
$186,000
39%
aCustomer numbers are ranked by operating income.
2. Memorandum
Date: Today
To: I. Sellit, Vice President for Marketing
From: I. M. Student
Subject: Customer-profitability profile
Chapter 05 - Activity-Based Costing and Management
5-76
SOLUTIONS TO CASES
CASE 5-68 (45 MINUTES)
1.
Activity-based costing (ABC) differs from traditional costing in that it focuses on activities
that consume resources as the fundamental cost drivers. ABC is a two-stage cost
2.
Calculations of total activity cost pools and pool rates:
Material handling ......
($113,208 1.06) [(5 parts 5,000 units) + (10 parts 5,000 units)]
Inspection .................
($235,850 1.06) (5,000 hours + 7,500 hours)
Chapter 05 - Activity-Based Costing and Management
5-77
CASE 5-68 (CONTINUED)
3.
JY-63
JY-63
RX-67
RX-67
20x4
Cost
Data
Estimated
20x5
Product
Cost
20x4
Cost
Data
Estimated
20x5
Product
Cost
Direct material:
1.08 cost increase* ...............
Material handling:
$1.60 per unit ........................
40,000
80,000
Inspection:
Inspection hours
5,000
7,500
5-78
CASE 5-68 (CONTINUED)
4.
CINCINNATI CYCLE COMPANY
BUDGETED STATEMENT OF GROSS MARGIN FOR 20X5
JY-63
RX-67
Total
Sales revenue .................................................
$3,621,000
$4,459,000
$8,080,000
Cost of goods manufactured and sold:
Beginning finished-goods inventory ............
$ 480,000
$ 600,000
$1,080,000
*Ending finished-goods inventory = (total product cost
units produced) ending
inventory in units:
Chapter 05 - Activity-Based Costing and Management
5-79
CASE 5-69 (60 MINUTES)
1.
Regular
Model
Advanced
Model
Deluxe
Model
Product costs based on traditional, volume-
based costing system ...............................
$210.00
$430.00
$464.00
2.
Product costs based on activity-based costing system:
Regular
Model
Advanced
Model
Deluxe
Model
Direct material .................................................
$ 20.00
$ 50.00
$ 84.00
aPool I:
Depreciation, machinery ...............................................................
$2,960,000
Chapter 05 - Activity-Based Costing and Management
5-80
CASE 5-69 (CONTINUED)
bPool II:
Engineering ...................................................................................
$ 700,000
cPool III:
Purchasing, receiving, and shipping ...........................................
$ 500,000
dPool IV:
Depreciation, taxes, and insurance for factory ...........................
$ 600,000
3.
Regular
Model
Advanced
Model
Deluxe
Model
Product costs based on activity-based
5-81
CASE 5-69 (CONTINUED)
4.
MEMORANDUM
Date:
Today
To:
President Madison Electric Pump Corporation
From:
I.M. Student
Subject:
Product costing
Based on the cost data from our traditional, volume-based product-costing system,
our regular model is not very profitable. Its reported actual contribution margin is only
5-82
CASE 5-69 (CONTINUED)
5.
The company should adopt and maintain the activity-based costing system. The price
of the regular model should be lowered to the $212. Lowering the price should enable
the firm to regain its competitive position in the market for the regular model. Further
Chapter 05 - Activity-Based Costing and Management
CASE 5-70 (20 MINUTES)
Regular
Model
Advanced
Model
Deluxe
Model
Traditional, volume-based costing system:
Traditional
Traditonal
Traditional
system
system
system
Product volume ......................................................
20,000
1,000
10,000
Total amount of cost distortion for entire
5-84
CASE 5-71 (20 MINUTES)
1.
The controller, Erin Jackson, has acted ethically up to this point. She correctly
pointed out to the president that the firm's traditional, volume-based product-costing
2.
The production manager, Alan Tyler, is not acting ethically. Although we can
3.
Jackson has an ethical obligation to the president, to the company, to her profession,
and to herself to report accurate product-costing data to the president. There is
nothing wrong with her offer to her friend to go over her analysis again to verify its
accuracy. However, she must report what she finds with no suppression or alteration
of the data. Several of the ethical standards for managerial accounting apply in this
case. (See Chapter 1 for a listing of these standards.) The standards that are most
clearly relevant include the following:
Integrity:
Credibility:
5-85
CASE 5-71 (CONTINUED)
Jackson is in a tough spot. Her professional obligation to report accurate product
costs is clear. She cannot ethically avoid this responsibility. Yet her friend Tyler is in
a tenuous position. What can Jackson ethically do for him? First, she can be
FOCUS ON ETHICS (See page 192 in the text.)
This scenario explores ethical issues surrounding activity-based costing. Among
the potential ethical issues in this situation are the following:
• How did the product proliferation problem at the Charlotte plant come about? Were
product-line managers more concerned with maintaining their spheres of influence
than making product discontinuance decisions that would be in the company’s best
interest? At the very least, the company seems to exhibit a lack of discipline and
focus. Products that have been dropped as a result of sound analysis should not
routinely creep back into the product line.
• Why did top management refuse to adopt the recommendations of the ABC
analysis? It is sometimes said that top managers are compensated and rewarded
• Alternatively, perhaps management is genuinely concerned about the implications
for their employees if a large number of products are dropped. Is it ethical for
management to put the interests of their employees ahead of those of the company’s
shareholders?
• Was it ethical for Xavier’s top management to sell the Engine Parts Division,
probably suspecting that the Charlotte plant would be closed and people would be
laid off?
