250 Chapter 5 AcivityBased Costing and Management Problem 55

250 Chapter 5 Acivity-Based Costing and Management Problem 5-54 ctivity Based Costing Montreal Electronics Company manufactures two large-screen stelevision models: the Nova, whlich has been prodeced for five years and sells for $900, and the Royal, a new model introduced in early 20so wbich sells for $1,140. Based on the following income statement for to concentrate Mcetreal\'s marketing resources on the Royal model and to begin to phase out the Nova (LO 2, 3,4,8, 7 20xI, a decision has been made Total cost oa model. 54.431 900 MONTREAL ELECTRONICS COMPAm oome Statement For the Year Ended December 31, 20xt Royal 4560.000 $19,800,000$24 3000 3132000 12500000 15,232 00 Cost of goods sald Gross magh 1,358000 $7280.020 8,628000 Seling and administrative expense 978.0005830000 68800 300000 1.430,000 1820,000 et iecoma Units prodaced and sod 4,000 S 9750 .0 Net income per unit sdld The standard unit costs for the Royal and Nova models are as follows: Reyal No 5584 $20 Direct materal Drect labor Royal 3.5hr x $12) 42 18 Machine usage 72 202 Manufacturing overhead Standurd cost 570 anfacturing ovehead was appled on the bass of machine hous at a e of $25 per no Montreal Electronics Company\'s controller is advocating the use of activity-based costing and activity- based management and has gaithered the following information about the company\'s manufacturing overhead costs for 20x1. Bamber of Erents Traceable Costs RoyalNova Tota Activity Center (cost driver) Solderg /amber of sider ants) ..- Shipments (number of shipments) Quality control jhumber of inspectians Purchase orders (number of order Machina power (rachine hours Machine setups hamber of setups Total traceable costs $942.000 ,000 1,185,000 1,570,000 3,800 16.200 20,000 21,300 56.20 77.500 950,400 109,980 0,100 190.080 6000 176,000192030 750,000 1400016,000 30,000 860,000 1240,000 57,600 $4,800,000 Required 1. Briefly explain how an activity-based costing system operates. 2. Using activity-based costing, determine if Montreal Electronics should continue to emphasize the Royal model and phase out the Nova model. ICMA atapted

Solution

Activity-based costing (ABC) is an accounting method that identifies and assigns costs to overhead activities and then assigns those costs to products. An activity-based costing (ABC) system recognizes the relationship between costs, overhead activities, and manufactured products, and through this relationship, it assigns indirect costs to products.This method os cos allocation is more effective than the traditional method of cost distribution. Activities Number of events Total costs Cost per event Soldering 942000 1570000                         0.60 Shipments 860000 20000                       43.00 Quality Control 1240000 77500                       16.00 Purchase Orders 950400 190080                         5.00 Machine Power 57600 192000                         0.30 Machine Setup 750000 30000                       25.00 Computation of standard cost for Royal and Nova Royal Nova Units Produced and sold 4000 22000 Sales 4560000 19800000 Direct Material 2336000 4576000 Direct Labour 168000 396000 Machine Usage 288000 3168000 Manufacturing Overhead Soldering                              0.60    231,000.00            711,000.00 Shipments                            43.00 163400 696600 Quality Control                            16.00 340800 899200 Purchase Orders                              5.00 549900 400500 Machine Power                              0.30        4,800.00               52,800.00 Machine Setup                            25.00 350000 400000 Total Costs of goods sold 4431900 11300100 Gross Profit 128100 8499900 Selling & Distribution Expense 978000 5830000 Net Income -849900 2669900 Net Income per unit          (212.48)                     121.36 As per the above analysis based on Activity based Costing, Montereal Electronics should emphasise the Nova model as it has net profit per unit of 121.36 whereas Royal Model has net loss. Note: Best efforts have been made to answer the question correctly. In case of any descrepencies kindly comment, I will try to resolve the same Please provide positive feedback