Question

Several years after reengineering its production process, Burke Corporation hired a new controller, Ashley Adams. She developed an ABC system very similar to the one used by Burke's chief rival. Part of the reason Adams developed the ABC system was because Burke's profits had been declining even though the company had shifted its product mix toward the product that had appeared most profitable under the old system. Before adopting the new ABC system, Burke had used a plantwide overhead rate based on direct labor hours that was developed years ago. E: (Click the icon to view the overhead costs and budgeted data.) Read the requirements. Requirement 1. Compute the gross profit per wheel if managers rely on the ABC unit cost data. (Enter amounts to two decimal places.) Begin by computing the total manufacturing cost per wheel for each wheel model. Burke Corporation Total cost per unit using ABC data Standard Deluxe Total manufacturing cost

Answer 1

Burke Corporation Total cost per unit using ABC data Standard Direct materials per wheel $30.00 Direct labor per wheel $45.90 Mfg. overhead cost per wheel $371.50 Total mfg. cost per wheel $447.40 Deluxe $46.00 $50.00 $516.50 $612.50 Sellin price per wheel Total mfg. cost per wheel Gross profit per wheel $470.00 $447.40 $22.60 $630.00 $612.50 [As calculated above] $17.50 [$470.00 - $447.40 = $22.60; $630.00 - $612.50 = $17.50] 2) Burke Corporation Total cost per unit using Plantwide data Direct materials per wheel Direct labor per wheel Mfg. overhead cost per wheel Total mfg. cost per wheel $30.00 $45.90 $384.80 $460.70 $46.00 $50.00 $503.20 $599.20 Sellin price per wheel Total mfg. cost per wheel Gross profit per wheel $470.00 $460.70 $9.30 $590.20 (sa calculated ca.Ove 59.30; 630.00-$5 $630.00 $599.20 [As calculated above] $30.80 [$470.00 - $460.70 = $9.30; $630.00 - $599.20 = $30.80]

3) If ABC cost data is used, Standard product line is more profitable to the company; If plantwide cost data is used, Deluxe product line is more profitable to the company. 4) The controller would have expected that the ABC system would pass the cost-benefit test because: --> ABC method identifies and uses effectively quantum of supporting activities utilized for each product line; --> ABC method looks rational in allocating mfg. overhead costs to product lines. The old system of allocating the plant-wide rates based on the direct labor hours as allocation base appeared broken because: --> This method allocates manufacturing overhead costs to all product lines without analyzing whether each product line has utilized supporting activities fully or not; --> As a result, this method allocates manufacturing overhead costs to product lines irrationally via blind plantwide rate approach.