ABC Versus ABM

Harvey Company produces two models of blenders: the "Super Model" (priced at $405) and the "Special Model" (priced at $202). Recently, Harvey has been losing market share with its Special Model because of competitors offering blenders with the same quality and features but at a lower price. A careful market study revealed that if Harvey could reduce the price of its Special Model to $182, it would regain its former share of the market. Management, however, is convinced that any price reduction must be accompanied by a cost reduction of the same amount so that per-unit profitability is not affected. Earl Wise, company controller, has indicated that poor overhead costing assignments may be distorting management's view of each product's cost and, therefore, the ability to know how to set selling prices. Earl has identified the following overhead activities: machining, inspection, and rework. The three activities, their costs, and practical capacities are as follows:

ActivityCostPractical CapacityMachining$5,412,00090,200 machine hoursInspection3,739,20045,600 inspection hoursRework1,828,00045,700 rework hours

The consumption patterns of the two products are as follows:

SpecialSuperUnits100,00027,800Machine hours48,40041,800Inspection hours10,00035,600Rework hours7,70038,000

Harvey assigns overhead costs to the two products using a plantwide rate based on machine hours.

Required:

1.Calculate the unit overhead cost of the Special Model using machine hours to assign overhead costs. Round intermediate calculations and your final answer to the nearest cent, if rounding is required.

$per unit

Now, repeat the calculation using ABC to assign overhead costs. Round intermediate calculations and your final answer to the nearest cent, if rounding is required.

$per unit

Did improving the accuracy of cost assignments solve Harvey's competitive problem?

No

2.Now, assume thatin additionto improving the accuracy of cost assignments, Earl observes that defective supplier components are the root cause of both the inspection and rework activities. Suppose further that Harvey has found a new supplier that provides higher-quality components such that inspection and rework costs are reduced by 50 percent. Now, calculate the cost of the Special Model (assuming that inspection and rework times are also reduced by 50 percent) using ABC. The relative consumption patterns also remain the same. Round intermediate calculations and your final answer to the nearest cent, if rounding is required.

$per unit

Comment on the difference between ABC and ABM.

-ABM is concerned with cost reduction as well as cost assignment, and it has allowed management to achieve the pricing objective.

-ABM is only concerned with how costs are assigned, and it has not helped management achieve its pricing objective.

-There is no difference between ABC and ABM.