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1. Calculate the unit manufacturing costs for simple desk and corner
workstation under ABC system.
Table1: Calculation of the Indirect Costs Allocated to the Products
Activity
Total
activity
cost(1)
Practica
Cost
simple desk
l
driver
capacit rate(3)= Usage Costs
y
(1)/(2)
(4)
(3)*(4)
(2)
$262,500
700
corner
workstation
Usa
ge
(5)
Costs
(3)*(5)
$375
40
15,000
120
$45,000
8520
42,600
173
25
$86,625
process
Make layered
panels
$861,500
172,30
0
$5
Handle material
$88,000
440
$200
60
12,000
45
$9,000
Setup machine
$40,000
1,600
$25
120
3,000
180
$4,500
Run machine
$601,250
23,125
$26
2400
62,400
315
0
$81,900
Inspect and
package the
product
$368,000
9,200
$40
1200
48,000
450
$18,000
Corner Workstation
$115,200
$115,200
10800
10800
15,000
45,000
42,600
86,625
Handle material
12,000
9,000
Setup machine
3,000
4,500
Run machine
62,400
81,900
48,000
18,000
309,000
476,775
1200
450
257.50
1,059.50
Simple desk
Corner Workstation
$315
$935
$257.50
$1059.50
Under ABC system, the unit manufacturing cost of simple desk is $257.50,
which is lower than the cost $315 under simple costing system. On the contrary,
the unit manufacturing cost of corner workstation under ABC system is $1059.50,
which is higher than the cost $935 under simple costing system (See Table3).
Identify the problem with simple costing and comment on how ABC system
solve the problem
The simple costing system used only one allocation base, direct
manufacturing labor hours, to allocate manufacturing overheads to different
products. It assumes all products consume all resources in proportion to direct
manufacturing labor hours. While the manufacturing processes and the products
they produced are more complex. Sometimes, the direct manufacturing labor hour
is not a cause-and-effect relationship with indirect cost. If we use it to allocate
indirect cost, the indirect cost will be assigned inaccurately. As result, simple desk
is over-cost while corner workstation is under-cost.
ABC system attempts to overcome this problem. ABC systems create
homogeneous cost pools linked to different activities. For each activity-cost pool,
ABC system seeks a cost allocation base that has a cause-and-effect relationship
with costs in the cost pool. Therefore, the indirect costs will be assigned based on
the consumption of resources to different products more accurately.
2. Based on your analysis for requirement 1, advise on the actions that
EWFs management team might take to improve the companys
profitability.
EWFs management can use the information of the ABC system to make a
better pricing decision to improve the companys profitability. The manager may
readjust the prices of simple desk and corner workstation.
Table4: Product profitability analysis(ABC system)
Simple desk(per
unit)
Corner workstation(per
unit)
$257.5
$1059.5
$154.5
$635.7
$412
$1695.2
Gross margin
37.5%
37.5%
Competitors price
$420
$1650
Full
costs
manufacturing
Markup (60%)
$720,000
Direct material
(315,00)
(13,500)
(131,250)
Nonmanufacturing costs
(180,000)
80,250
Thus, if EWF want to be the market leader in Multi-pack Desk with shelves, it
should introduce it in 2010.
Forth, EWF should consider the reliability of the expected units sold. The low
units sold expected in 2010 may due to the unawareness of customers in introduction
stage of new product. Customer may get used to the new product in the next year. Thus,
EWF should estimate the units sold for few years instead of one year in order to raise
the reliability of its estimate.