ABC Versus ABM

Whitaker Company produces two models of blenders for restaurants: the Super Model (priced at $401) and the Special Model (priced at $201). Recently, Whitaker 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 Whitaker could reduce the price of its Special Model to $180, 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. James Davis, 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. James has identified the following overhead activities: machining, inspection, and rework. The three activities, their costs, and practical capacities are as follows:

Activity	Cost	Practical Capacity
Machining	$5,424,000	90,400 machine hours
Inspection	3,507,600	44,400 inspection hours
Rework	1,914,700	46,700 rework hours

The consumption patterns of the two products are as follows:

	Special	Super
Units	100,000	31,800
Machine hours	51,100	39,300
Inspection hours	9,900	34,500
Rework hours	8,000	38,700

Whitaker 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. $fill in the blank 1 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. $fill in the blank 2 per unit

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

YesNoInformation given is insufficient to answer

2. Now, assume that in addition to improving the accuracy of cost assignments, James observes that defective supplier components are the root cause of both the inspection and rework activities. Suppose further that Whitaker 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. $fill in the blank 4 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.

3. In Requirements 1 and 2, identify which of the data analytic types apply (descriptive, diagnostic, predictive, and prescriptive). See Exhibits 2.5 and 2.6, pp. 37, 40, for a brief review of data analytic types.

Descriptive and DiagnosticDiagnostic and PredictivePredictive and PrescriptivePrescriptive and Descriptive