Question
Activity Based Costing Case I say it's time we cut back on the X-20 model and shift our resources toward the new Z-50 model, said
Activity Based Costing Case
"I say it's time we cut back on the X-20 model and shift our resources toward the new Z-50 model," said Jayden Battaglia, executive vice president of Abdex Products, Inc. "Just look at this statement I've received from accounting. The Z-50 is generating more than sixteen times the profits of the X-20, and it has only about one fifth as much in sales. I've become convinced that our future depends on the Z-50." The statement to which Tanika was referring follows:
ABDEX PRODUCTS, INC.
Income Statement
For the Year Ended June 30, 2023
Total Z-50 X-20
Sales $ 2,330,000 $ 430,000 $1,900,000
Cost of goods sold 1,920,000 220,000 1,700,000
Gross margin 410,000 210,000 200,000
Less selling and
administrative expenses 233,000 43,000 190,000
Net Income $177,000 $ 167,000 $ 10,000
Number of units
produced and sold - 1,000 5,000
Net income per unit sold - $167 $2
"The numbers sure look that way," replied Jahi Zayas, the company's sales vice president. "But why aren't our competitors more excited about the Z-50? I know we've only been producing the product for three years, but it seems like more of them would recognize what a money maker it is."
"I think its our new automated plant," said Jayden. "Now it takes only two direct labor-hours to produce a unit of the Z-50 and three hours to produce a unit of the X-20. That's half of what it used to take us."
"Automation is marvelous," replied Jahi. "I suppose that's how we're able to hold down the price on the Z-50. Why, Ajama Company in Japan started to bring out a Z-50 but discovered they couldn't touch our price. But Ajama is killing us on the X-20; I suppose they'll pick up our X-20 customers as we move out of that market. But who cares? We don't even have to advertise the Z-50; it just seems to sell itself."
"My only concern about automation is how our overhead rate has shot up," said Jayden. "Our total overhead cost was $816,000 for the fiscal year that just ended. That comes out to a hefty amount per direct labor-hour, but old Mike down in accounting has been using labor-hours as a base for computing overhead rates for years and doesn't want to change. I don't suppose it matters so long as costs get assigned to products."
"That bookkeeping bores me," replied Jahi. "But I think you've got a problem in production. I had lunch with Hanna yesterday, and she was complaining about how complex the Z-50 is to produce. Apparently, they have to do a lot of machine setups and other engineering work just to keep production moving on the Z-50. "
"It'll have to wait," said Jayden. "I'm writing a proposal to the board to phase out the X-20 as rapidly as possible. We've got to bring those profits up or we'll all be looking for jobs."
***************************************************************************************
Assume that there was no under or overallocated overhead for the year and that direct materials and direct labor (per unit of output) for the products were as follows:
Z-50 X-20
Direct Materials $100 $160
Direct Labor $ 24 $ 36
Assume also that the company's $816,000 in overhead cost is related to four activities as follows:
|
|
Number of Events or Transactions | ||
|
Activity Cost |
Total |
Z-50 |
X-20 |
Machine Related Costs |
$450,000 |
9,000 machine-hrs |
4,000 machine-hrs |
5,000 machine-hrs |
Setup and Inspections |
180,000 |
40 production runs |
20 production runs |
20 production runs |
Engineering Change |
90,000 |
100 change orders |
75 change orders |
25 change orders |
Plant Related Costs |
96,000 |
1,920 sq. ft. |
1,536 sq. ft. |
384 sq. ft. |
|
$816,000 |
|
|
|
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started