Activity-Based Costing; Activity-Based management
Montreal Electronics Company manufactures two large-screen television models: the Nova, which has been produced for 10 years and sells for S900, and the Royal. a new model introduced in early 20xO, which sells for $1,140. Based on the following income statement for 20x1, a decision has been made to concentrate Montreal's marketing resources on the Royal model and to begin to phase out the Nova model.
MONTREAL ELECTRONICS COMPANY Income Statement For theYear Ended December 31 , 20x1 | |||
R oyal | N ova | Tota l | |
Sales . |
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Cost of goods sold | $4.560,000 | $1 9,800,000 | $24,360.00 |
Gross margin | 3,192,000 | 12,540,000 | 15,732,000 |
Selling and administrative expense | $1 .368,000 | $ 7.260.000 | $8,628,000 |
Net income | 978,000 | 5 .830,000 | 6 .808,000 |
Units produced and sold . | $ 390 000 | $ 1.430.000 | $1,820,000 |
Net income per unit sold | 4,000 | 22,000 | |
$97.50 | $65.00 | ||
The standard unit costs for the Royal and Nova models are as follows:
Royal | Nova | |
Direct material | $584 | 208 |
Direct labor: | ||
Royal (3.5 hr. x $1 2) | 42 | |
Nova(1.5hr. x $1 2) | 18 | |
Machine usage: | ||
Royal(4hr. x $18) | 72 | |
Nova (8hr. x $1 8). | 144 | |
Manufacturing overhead* | 100 | 200 |
Standard cost | $798 | $570 |
* Manufacturing overhead was applied on the basis of machine hours at a predetermined rate of $25perhour.
Montreal Electronics Company's controller is advocating the use of activity-based costing and activity based management and has gathered the following information about the company's manufacturing overhead costs for 20x1.
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| Number of Events | ||
Activity Center(cost driver) | Traceable Costs | Royal | Nova | Total |
Soldering(number of solder joints) | $ 942,000 | 385,000 | 1,185,000 | 1,570,000 |
Shipments(number of shipments) | 860,000 | 3,800 | 16,200 | 20,000 |
Quality control (number of inspections | 1,240,000 | 21 ,300 | 56,200 | 77,500 |
Purchase orders(number of orders) | 950,400 | 109,980 | 80,100 | 190,080 |
Machine power (machine hours | 57,600 | 16,000 | 176,000 | 192,000 |
Machine setups(number of setups) | 750,000 | 14,000 | 16,000 | 30,000 |
Total traceable costs | $4,800,000 |
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Required:
1. Briefly explain how an activity-based costing system operates.
2. Using activity-based costing. determine if Montreal Electronics should continue to emphasize the Royal model and phase out the Nova model.
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