Benefits of activitybased costing adapted from the CMA exam

Benefits of activity-based costing (adapted from the CMA exam). Enviro, Inc. has just completed a major change in the method it uses to inspect its products. Previously, l nspectors examined the product after each major process. The salaries of these in tors were charged as direct labor to the operation or job. In ciency, the Enviro production m system consisting of a microcomputer, 30 video cameras, peripheral spec- an effort to improve effi- anager recently bought a computerized quality control hardware, and soft e. The ca of the product and comparing these pictures with a known \"good\" image supplied by a quality control engin control inspectors with just two quality control engineers meras are placed at key points in the production process, taking pictures eer. This new system allowed Enviro to replace the 12 quality he president of the company was confused. She was told that the production process was now more efficient, yet she noticed a large increase in the factory overhea rate. The computation of the rate before and after automation is as follows Before After Budgeted Overhead . .. 1,800,000 1,200,000 $2,400,000 800,000 Budgeted Overhead Rate. 150% 300%

Solution

Allocation of Indirect Cost Particulars Cost Driver Dreemer Sleeper Administration D. Labour $       34,722.22 $     15,277.78 Production Setup Production Runs $       15,000.00 $     60,000.00 Quality Control Inspections $       30,000.00 $     60,000.00 Sales & Marketing Advertisments $       50,000.00 $ 1,00,000.00 $   1,29,722.22 $ 2,35,277.78 Income Statement Particulars Dreemer Sleeper Total Revenue $       6,95,000.00 $   2,80,000.00 $ 9,75,000.00 Direct Material $       2,50,000.00 $   1,10,000.00 $ 3,60,000.00 Direct Labour $       1,00,000.00 $       50,000.00 $ 1,50,000.00 Indirect Costs $       1,29,722.22 $   2,35,277.78 $ 3,65,000.00 Operating Profit $       2,15,277.78 $ -1,15,277.78 $ 1,00,000.00