Question

Ultratech, 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. Ultratech plans to sell 79,000 of the TV boards in 20x4 at a price of $450 per unit. The second high-volume product, a personal computer circuit board, is a recent addition to Ultratech’s product line. Because the PC board incorporates the latest technology, it can be sold at a premium price. The 20x4 plans include the sale of 54,000 PC boards at $785 per unit.

Ultratech’s management group is meeting to discuss how to spend the sales and promotion dollars for 20x4. The sales manager believes that the market share for the TV board could be expanded by concentrating Ultratech’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 the PC board is more than double the contribution from the 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	$	243		$	153
Direct labor		3.5	hr.		1.5	hr.
Machine time		1.5	hr.		1.5	hr.

Variable manufacturing overhead is applied on the basis of direct-labor hours. For 20x4, variable overhead is budgeted at $26,469,450, and direct-labor hours are estimated at 322,875. The hourly rates for machine time and direct labor are $26 and $34, 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 20x4 expenditures for direct material are budgeted at $25,209,000.

Andrew Fulton, Ultratech’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	$	940,000		Number of parts		8,024,100 parts
Production scheduling		510,000		Number of boards		139,650 boards
Packaging and shipping		1,020,000		Number of boards		139,650 boards
Total	$	2,470,000
Machine setup	$	948,000		Number of setups		615,300 setups
Hazardous waste disposal		124,000		Pounds of waste		50,337 pounds
Quality control		1,204,000		Number of inspections		475,650 inspections
General supplies		174,000		Number of boards		139,650 boards
Total	$	2,450,000
Machine insertion	$	3,100,000		Number of parts		5,658,000 parts
Manual insertion		9,400,000		Number of parts		2,256,000 parts
Wave-soldering		334,000		Number of boards		139,650 boards
Total	$	12,834,000

Required per unit	PC Board			TV Board
Parts:		83			40
Machine insertions		50			39
Manual insertions		33			1
Machine setups		5			4
Hazardous waste disposal		.80	lb.		.06	lb.
Inspections		4			3

2.	On the basis of Ultratech’s unit cost data given in the problem, calculate the total amount that each of the two product lines will contribute toward covering fixed costs and profit in 20x4. (Round your intermediate calculations to 2 decimal places.) PC Board TV Board Total Contribution Margin

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 20x4. (Round your intermediate calculations to 2 decimal places.)

Answer 1

B) Calculation of Total Contribution of both the products based on the basis of unit cost data

Particulars	TV Board	PC Board
Calculation on per unit basis:
Selling Price per unit (a)	450	785
Direct Materials per unit (b)	153	243
Direct labour per unit (c)	51	119
	[34*1.5]	[34*3.5]
Machine rate charges	39	39
	[26*1.5]	[26*1.5]
Variable manufacturing overheads	122.97	286.93
{Variable manufacTuring overhead per direct labour hour = 26,469,450/322,875 = 81.98 per direct labour hour}	[81.98*1.5]	[81.98*3.5]
Material Handling Charges [b * 10%]	15.3	24.3
Contribution per unit	68.73	72.77
Total Number of Units(d)	79000	54000
TOTAL CONTRIBUTION TO COVER FIXED COSTS AND PROFITS	5,429,670	3,929,580

As per the unit cost data, the TV Boards are contributing to a much higher extent than the PC Board in terms of gross value.

C) Calculation of Total Contribution of both the products based on the basis of Activity Based Costing

Particulars	Total Cost(A)	Cost Driver	Budgeted Annual Activity for Cost Driver (B)	Cost on per unit basis for each cost driver(A/B)	TV Board		PC Board
									Cost driver per unit	Cost per unit	Cost driver per unit	Cost per unit
					Direct Material					-	153	-	243
Procurement	940000	Number of parts	8,024,100 parts	0.12	40.00	4.69	83.00	9.72
Production scheduling	510000	Number of boards	139,650 boards	3.65	1.00	3.65	1.00	3.65
Packaging and shipping	1020000	Number of boards	139,650 boards	7.30	1.00	7.30	1.00	7.30
Machine setup	948000	Number of setups	615,300 setups	1.54	4.00	6.16	5.00	7.70
Hazardous waste disposal	124000	Pounds of waste	50,337 pounds	2.46	0.06	0.15	0.80	1.97
Quality control	1204000	Number of inspections	475,650 inspections	2.53	3.00	7.59	4.00	10.13
General supplies	174000	Number of boards	139,650 boards	1.25	1.00	1.25	1.00	1.25
Machine insertion	3100000	Number of parts	5,658,000 parts	0.55	39.00	21.37	50.00	27.39
Manual insertion	9400000	Number of parts	2,256,000 parts	4.17	1.00	4.17	33.00	137.50
Wave-soldering	334000	Number of boards	139,650 boards	2.39	1.00	2.39	1.00	2.39
Total Variable Costs per unit						211.72		452.01
Selling Price per unit						450.00		785.00
Contribution per unit						238.28		332.99
Total number of units						79,000		54,000
TOTAL CONTRIBUTION TO COVER FIXED COSTS AND PROFITS						18,824,229		17,981,404

As you can see in both the answers, Activity based costing has levelled to the overhead costs to the same level. Also, in the activity based costing, only the relevant costs are included. Therefore the profits of both the products have significantly increased.