Activity based costing

250 Chapter 5 Activity-Based Costing and Management Problem 5-54 ctivity Based Costing Actvity-Based Managementb Montreal Electronics Company manufactures two large-scroen television models: the Nova, which has been prodeced for five years and sells for $900, and the Royal, a new model introduced in early 20so, wbich sells for $1,140. Based on the following income statement for 20x I, a decision has been to concentrate Moetreal's marketing resources on the Royal model and to begin to phase out the Nova model. Total cost oa 4.431 900 MONTREAL ELECTRONICS COMPARY soome Statement For the Year Ended Docember 31, 20a1 Total 4560.000 $19,800,000$24 3000 3132000 12500000 15,232 00 1,358000 $7.280,000 8628.000 978.0005830000 68800 300000 1.430000 1820000 Saks Cost of goods sl Gros margin Seling and adminststive expne et iecoma Units prodaced and sod Nat income per unit sdld 9750 5.0 The standard unit costs for the Royal and Nova models are as follows Royal Ne 5584 $20 Direct materal Direct lsbor 42 Royal (3.5hr x $12 18 Machine usae 72 202 Manufacturing overhead Standurd cost 570 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 overhead costs for 20x1 Humber of Erents Tracoable Costs RoyalNova Total Activity Center (cost driver Soldering namber of sdider joint) Shipments (sumber of shipments Quasity control Ihumber of irspectians Purchase crders (number of ondar Machina power (rachine hours) Machins setups (hamber of setups Total traceable costs 942000 385,000 1,185,000 1,570.000 3,800 16.200 20,000 21,300 56.200 77,500 860,000 1,240,000 57,600 $4,800,000 50,400 100,980 800 080 6000 176,000192030 750,00014,000 16,000 30,000 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. ICMA adapted