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
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Because more categories and more refining provide more accurate information, but it is really difficult and costly to track more categories. The best option is to simplify the categories, in result, reducing the cost of ABC system.
7. When allocating fixed overhead costs using operating capacity, it is easy to determine how much each product costs at capacity and be able to manage the costs based fixed overhead costs. But when allocating fixed overhead costs using the expected unit sold, then overhead allocation will be distorted. By allocating overhead costs based on capacity this distortion can be avoid. That is why, using the operating capacity for allocating fixed overhead costs can result accurate cost.
8. a) Allocation the overhead to the three product categories:
Unframed prints Steel-framed print, with no matting Wood-framed prints, with matting Volume- expected unites sold 80,000 15,000 7,000 Manufacturing Overhead
Picking prints
(0.30×80,000) 24,000
(0.30×15,000) 4,500
(0.30×7,000) 2,100
Inventory selection and management
(0.70×80,000) 56,000
(1.40×15,000) 21,000
(2.10×7,000) 14,700
Web-site optimization: Unframed
(0.258×80,000) 20,640 Framed
(4.128×15,000) 61,920
(4.128×7,000) 28,896 Framing and matting
(2.10×15,000) 63,000
(2.10×7,000) 44,100 Total cost $100,640 $150,420 $89,796
b) Total amount of manufacturing overhead
The purpose of this report is discussing the case of Wilkerson Company that confronting tough competition in price cutting in pumps which caused to a big drop of pre-tax operating income from 10% to 3%. After observing the existing costing allocation, we found out there is an issue on the existing costing report that the manager could not be able to see the real situation. In light of this, there will be brought to the discussion on the feasibility of using an alternative costing method – Activity based costing (ABC) in the latter paragraphs.
Overhead costs are not in proportion to the production output because of the method they are using. This leads to inaccurate pricing and costing decisions. An Activity Based Costing System would help find the real relationship between the products produced and overhead.
The focus of EEC’s investment of the purchasing of the supplier is to cut down on
a service department’s costs have been allocated, costs are not reallocated back to it under
Glaser Health Products manufactures medical items for the health care industry. Production involves machining, assembly and painting. Finished units are then packed and shipped. The financial controller is interested to introduce an activity-based costing (ABC) system to allocate (or distribute) indirect costs to products. Indirect costs, as distinct from direct costs, cannot be unambiguously linked to specific products. The controller would like to calculate product costs based on ABC for planning and control, not inventory valuation.
Assignment using normal activity produces less fluctuation in period-to-period overhead assignments. It also avoids assigning the costs to idle capacity to products when production is down.
According to the fact of this case, Parent Co. (Parent) wholly owns Poor Son Co. (Poor Son) as a legal subsidiary, and both of them all nonpublic companies. However, in January 2007 Poor Son filed a voluntary bankruptcy under Chapter 11 of the U.S. bankruptcy code because of its inability of meet obligations as they became due. Then, Parent claimed the loss of control of Poor Son and deconsolidated Poor Son from its financial statement. Through the bidding process in May 2009, Poor Son and OtherCo, the winning sponsor, filed a joint plan of reorganization to the bankruptcy court, but the plan was rescinded by OtherCo later due to significant market value shrink of Poor Son. After that, the
This paper provides a brief presentation of Activity-Based Costing methodology, how is used as well as its short comings.
3. Store equipment of $44,000 was purchased by signing a short-term note payable. Also, a $150,000 telecommunications system was acquired by issuing 3,000 shares of preferred stock.
Historic cost depreciation is being used which leads to skewed numbers that misrepresent how well a product line will continue to operate in the future due to understated replacement value of fixed assets.
Wall Décor might have a business problems in the near future if the company still allocates manufacturing overhead based on the cost of the prints. From the question No.5, the result shown over costing and under costing for unframed prints and framed prints, respectively. Calculating by this method resulting in the cost of unframed print is much higher than it should be and the cost of framed
Company operates in the Industrial Sector – Services, and Industry – Regional Airlines. According to the Standard Industrial Classification System (SIC), company belongs to the industry group 451: Air
INTRODUCTION Businesses – from manufacturing, merchandising and service industries alike – take careful consideration in the analysis of their costing systems in order to be able to set up competitive prices in the market. Misallocation of costs may lead to incorrect price estimates, continuous production of unprofitable products, and ineffective processing schedules. In this case study, we will discuss the costing methods which Zauner Ornaments have used or is currently using and, in conclusion, be able to distinguish the advantages and disadvantages of each costing method. CASE CONTEXT The case seeks to assist Zauner’s comptroller, Yu Chia-yi, in determining the best costing method for their overhead costs. In addition we also aim to
The current method of apportioning production overheads based on direct labour hours can be described as a traditional approach to product costing. In a manufacturing company’s financial statements, each item produced must be allocated some of the production overheads to make the statements compliant. Sometimes the individual costs of these items can be calculated incorrectly based on overall production overhead and the system of allocating in place, however the overall financial statement can still be accurate. This traditional method of allocating the production
During the 1980s the limitations of traditional product costing systems began to be widely publicised. These systems were designed decades ago when most companies manufactured a narrow range of products, and direct labour and materials were the dominant factory costs. Overhead costs were relatively small, and the distortions arising from inappropriate overhead allocations were not significant. Information processing costs were high, and it was therefore difficult to justify more sophisticated overhead allocation methods.