ACC560 Case 2 ANSWERS

ACC560 Case 2 ANSWERS - Week 3 Case 2: Greetings Inc.:...

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Week 3 Case 2: Greetings Inc.: Activity-Based Costing Course: Managerial Accounting (ACC 560) 1. Answer: Two reasons why an activity-based costing (ABC) system may be appropriate for Wall Décor would be as follows. (1.) ABC system leads to more accurate product costing . By breaking costs down into more refined categories, product costing will be even more accurate. That is, ABC system can lead to more cost pools being used to assign overhead costs to products, and then costs can be assigned more directly on the basis of the cost drivers used to produce each product. However, in this case of Wall Décor, traditional overhead allocation, which is based on the cost of print and volume of expected units sold to assign overhead costs, often results in that the unframed prints are being allocated too much overhead costs and framed prints too little overhead costs. (2.) ABC system leads to enhanced control over overhead costs . The reason is that using the ABC system, companies can trace many overhead costs directly to activities – allowing some indirect costs to be identified as direct costs. In the Wall Décor, the information technology (IT) department has the highest overhead costs including two out of the four activities occurring, which are website optimization and framing and matting. ABC system can reflect that a large portion of overhead costs is associated with the framing and matting component of the production area. This allows manager to better track the activities that lead to costs. 2. Answer: 1
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per activity by the number of cost drivers expected to be used per activity. The formula for the activity-based overhead rate is: Estimated Overhead per Activity ÷ Expected Use of Cost Drivers per Activity = Activity-Based Overhead Rate Compute the activity-based overhead rates for each of the four activities. Activity Cost Pools Estimated Overhead ÷ Expected Use Of Cost Drivers by = Activity Activity-Based Overhead Rates Picking prints $30,600 102,000 prints $0.30 per print Inventory selection and management $91,700 131,000 components $0.70 per component Website optimization Unframed: $25,800 Framed: $103,200 Unframed: 100,000 print capacity Framed: 25,000 print capacity Unframed: $0.258 per print Framed: $4.128 per print Framing and matting cost $123,900 59,000 components at capacity $2.10 per component Thus, the activity-based overhead rates are as follows. a. Picking prints is $0.30 per print, b. Inventory selection and management is $0.70 per component, c. Website optimization (unframed print) is $0.258 per print capacity, and website optimization (framed print) is $4.128 per print capacity, d. Framing and matting is $2.10 per component capacity. 3. Answer
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ACC560 Case 2 ANSWERS - Week 3 Case 2: Greetings Inc.:...

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