Question

Manchester Technology, Inc. manufactures several different types of printed circuit boards; however, two of the boards account for the majority of the company’s sales. The first of these boards, a television circuit board, has been a standard in the industry for several years. The market for this type of board is competitive and price-sensitive. Manchester plans to sell 69,000 of the TV boards in 20x1 at a price of $430 per unit. The second high-volume product, a personal computer circuit board, is a recent addition to Manchester’s product line. Because the PC board incorporates the latest technology, it can be sold at a premium price. The 20x1 plans include the sale of 44,000 PC boards at $750 per unit.

Manchester’s management group is meeting to discuss how to spend the sales and promotion dollars for 20x1. The sales manager believes that the market share for the TV board could be expanded by concentrating Manchester’s promotional efforts in this area. In response to this suggestion, the production manager said, “Why don’t you go after a bigger market for the PC board? The cost sheets that I get show that the contribution from a PC board is significantly larger than the contribution from a TV board. I know we get a premium price for the PC board. Selling it should help overall profitability.”

The cost-accounting system shows that the following costs apply to the PC and TV boards.

	PC Board			TV Board
Direct material	$	223		$	143
Direct labor		3.5	hr.		1.0	hr.
Machine time		1.5	hr.		1.0	hr.

  

Variable manufacturing overhead is applied on the basis of direct-labor hours. For 20x1, variable overhead is budgeted at $2,300,000, and direct-labor hours are estimated at 234,150. The hourly rates for machine time and direct labor are $28 and $36, respectively. The company applies a material-handling charge at 10 percent of material cost. This material-handling charge is not included in variable manufacturing overhead. Total 20x1 expenditures for direct material are budgeted at $19,679,000.

Andrew Fulton, Manchester’s controller, believes that before the management group proceeds with the discussion about allocating sales and promotional dollars to individual products, it might be worthwhile to look at these products on the basis of the activities involved in their production. Fulton has prepared the following schedule to help the management group understand this concept.

“Using this information,” Fulton explained, “we can calculate an activity-based cost for each TV board and each PC board and then compare it to the standard cost we have been using. The only cost that remains the same for both cost methods is the cost of direct material. The cost drivers will replace the direct labor, machine time, and overhead costs in the old standard cost figures.”

  

Budgeted Cost				Cost Driver	Budgeted Annual Activity for Cost Driver
Procurement	$	840,000		Number of parts		5,084,100	parts
Production scheduling		460,000		Number of boards		118,650	boards
Packaging and shipping		920,000		Number of boards		118,650	boards
Total	$	2,220,000
Machine setup	$	908,000		Number of setups		283,500	setups
Hazardous waste disposal		104,000		Pounds of waste		32,067	pounds
Quality control		1,144,000		Number of inspections		283,500	inspections
General supplies		144,000		Number of boards		118,650	boards
Total	$	2,300,000
Machine insertion	$	2,600,000		Number of parts		3,681,000	parts
Manual insertion		8,400,000		Number of parts		1,310,000	parts
Wave-soldering		284,000		Number of boards		118,650	boards
Total	$	11,284,000

  

Required per Unit	PC Board			TV Board
Parts:		63			30
Machine insertions		40			29
Manual insertions		23			1
Machine setups		3			2
Hazardous waste disposal, in lb.		.60			.06
Inspections		3			2

  

Required:

3. Using activity-based costing, calculate the total amount that each of the two product lines will contribute toward covering fixed costs and profit in 20x1.

Answer 1

Calculation of Cost Driver rate as per Activity Based Costing        

Budgeted Cost				Cost Driver	Budgeted Annual Activity for Cost Driver			Cost Driver Rate
Procurement	$	840,000		Number of parts		5,084,100	parts	0.165 per part
Production scheduling		460,000		Number of boards		118,650	boards	3.877 per board
Packaging and shipping		920,000		Number of boards		118,650	boards	7.754 per board
Total	$	2,220,000
Machine setup	$	908,000		Number of setups		283,500	Setups	3.203 per setup
Hazardous waste disposal		104,000		Pounds of waste		32,067	Pounds	3.243 per pound
Quality control		1,144,000		Number of inspections		283,500	inspections	4.036 per inspection
General supplies		144,000		Number of boards		118,650	Boards	1.214 per board
Total	$	2,300,000
Machine insertion	$	2,600,000		Number of parts		3,681,000	Parts	0.706 per part
Manual insertion		8,400,000		Number of parts		1,310,000	Parts	6.412 per part
Wave-soldering		284,000		Number of boards		118,650	Boards	2.394 per board
Total	$	11,284,000

Calculation of Contribution per unit of Boards

Particulars	PC Board	TV Board
Sale price	750	430
Less:- Expenses
Direct Material	223	143
Direct Labour	126 (3.5*36)	36(1*36)
Machine time	42 (1.5*28)	28 (1*28)
Procurement	10.395 (0.165*63)	4.95 (0.165*30)
Production scheduling	3.877	3.877
Packaging and shipping	7.754	7.754
Machine setup	9.609 (3.203*3)	6.406 (3.203*2)
Hazardous waste disposal	1.946 (3.243*0.60)	0.195 (3.243*0.06)
Quality control	12.108 (4.036*3)	8.072 (4.036*2)
General supplies	1.214	1.214
Machine insertion	28.24 (0.706*40)	20.474 (0.706*29)
Manual insertion	147.476 (6.412*23)	6.412 (6.412*1)
Wave-soldering	2.394	2.394
Contribution per unit	133.987	161.252
Number of units to be sold	44,000	69,000
Total contribution towards fixed cost & profit	5,895,428	11,126,388