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Unformatted text preview: © 2008 For Instructor Use Only Case 2-1 CASE 2 1. ABC is beneficial when traditional overhead allocation results in inaccu- rate product costing. Wall Dêcor should investigate the product costing system because in order to sell the unframed prints the stores must mark them up only slightly above their cost, while the framed prints enjoy a large profit margin. Traditional overhead allocation often results in inappropriate overhead allocation when one product is a high- volume item (in this case, the unframed prints) and another product is a more complex, low-volume item (in this case, the framed prints). Another indication that ABC would be beneficial occurs when company managers have begun to develop their own costing systems because they have lost faith in the traditional system. In this case, the produc- tion manager does not have faith in the company’s costing system and instead has developed her own costing system. 2. The activity-based overhead rates can be calculated by dividing the estimated overhead associated with each activity by the expected use of the cost driver. © 2008 For Instructor Use Only Case 2-2 CASE 2 (Continued) Activity Cost Driver Estimated Overhead Expected Use of Cost Driver Activity-Based Overhead Rate Picking prints Number of prints $ 30,600 (80,000 + 15,000 + 7,000) = 102,000 prints $0.30 per pick Inventory selection and management Number of components: Print (1) Print and frame (2) Print, mat, and frame (3) $ 91,700 Prints: 80,000 components Print and frame: 15,000 X 2 = 30,000 components Print, mat, and frame: 7,000 X 3 = 21,000 components Total = 131,000 components $0.70 per component Website optimization Unframed Framed Number of prints at capacity $ 25,800 $103,200 Unframed prints— 100,000 print capacity Framed or framed and matted prints— 25,000 capacity $0.258 per print $4.128 per framed or framed and matted print Framing and matting Number of components at capacity $123,900 $375,200 Print and frame: 16,000 X 2 = 32,000 components at capacity Print, mat, and frame: 9,000 X 3 = 27,000 components at capacity Total = 59,000 components $2.10 per component © 2008...
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- Fall '08
- unframed prints