Managerial Accounting: Chapter 4 Case 2
Chapter 4
Case 2: Greetings Inc.: Activity-Based Costing
Solution:
1. An activity-based costing system may be appropriate for Wall Décor, when overhead allocation based job-order costing provides product cost distortion. As seen on previous case, this distortion happens when one product is manufacturing in high volume and the others are manufacturing in complexity as well as in low volume. In this situation Wall Décor should change its costing system for selling its high volume produced products whereas low-volume produced products have good profit.
2. The activity-based overhead rates for each of the four activities:
Activity Estimated Overhead Expected use of Cost Drivers Activity-Based Overhead Rates Picking prints $36,000 102,000 prints $0.30 per print Inventory selection and management $91,700 131,000 components $0.70 per component Web-site optimization:
Unframed $25,800 100,000 prints at capacity $0.258 per print at capacity
Framed $103,200 25,000 prints at capacity $4.128 per print at capacity Framing and matting $123,900 59,000 components at capacity $2.10 per component at capacity
3. The product costs for the following items using ABC:
Cost Elements Lance Armstrong unframed print John Elway print in steel frame, no mat Lambeau Field print in wood frame with mat
Direct Material
Print 12 16 20
Frame and glass 4 6
Matting 4 Direct Labor
(10/60×12) 2
(10/60×12)+(20/60×21) 9
(10/60×12)+(30/60×21) 12.50 Manufacturing Overhead
Picking prints
(1 print × 0.30) 0.30
(1 print × 0.30) 0.30
(1 print × 0.30) 0.30
Inventory selection and management
(1 component × 0.70) 0.70
(2 components × 0.70) 1.40
(3 components × 0.70) 2.10
Web-site optimization: Unframed
(1 print × 0.258) 0.258 Framed
(1 print × 4.128) 4.128
(1 print × 4.128) 4.128 Framing and matting
(2 components × 2.10) 4.20
(3 components × 2.10) 6.30
Case 2: Greetings Inc.: Activity-Based Costing
Solution:
1. An activity-based costing system may be appropriate for Wall Décor, when overhead allocation based job-order costing provides product cost distortion. As seen on previous case, this distortion happens when one product is manufacturing in high volume and the others are manufacturing in complexity as well as in low volume. In this situation Wall Décor should change its costing system for selling its high volume produced products whereas low-volume produced products have good profit.
2. The activity-based overhead rates for each of the four activities:
Activity Estimated Overhead Expected use of Cost Drivers Activity-Based Overhead Rates Picking prints $36,000 102,000 prints $0.30 per print Inventory selection and management $91,700 131,000 components $0.70 per component Web-site optimization:
Unframed $25,800 100,000 prints at capacity $0.258 per print at capacity
Framed $103,200 25,000 prints at capacity $4.128 per print at capacity Framing and matting $123,900 59,000 components at capacity $2.10 per component at capacity
3. The product costs for the following items using ABC:
Cost Elements Lance Armstrong unframed print John Elway print in steel frame, no mat Lambeau Field print in wood frame with mat
Direct Material
Print 12 16 20
Frame and glass 4 6
Matting 4 Direct Labor
(10/60×12) 2
(10/60×12)+(20/60×21) 9
(10/60×12)+(30/60×21) 12.50 Manufacturing Overhead
Picking prints
(1 print × 0.30) 0.30
(1 print × 0.30) 0.30
(1 print × 0.30) 0.30
Inventory selection and management
(1 component × 0.70) 0.70
(2 components × 0.70) 1.40
(3 components × 0.70) 2.10
Web-site optimization: Unframed
(1 print × 0.258) 0.258 Framed
(1 print × 4.128) 4.128
(1 print × 4.128) 4.128 Framing and matting
(2 components × 2.10) 4.20
(3 components × 2.10) 6.30