Background

You are a Consultant for the professional service firm, BUSI 2083 LLP. Your firm specializes in providing a

wide variety of internal business solutions for different clients. It is your first day on the job and a

Manager asks you for some help with a client in the Technology & Entertainment sector. Eager to please

on your first day, you start reading the background information provided by the Manager.

4D Entertainment, a division of Wave of the Future Corporation, manufactures two large-screen

television models: the Zenith, which has been produced since 2008 and sells for $1,700, and the

Pinnacle, a new model introduced in early 2008, which sells for $2,200. Based on the following income

statement for the year ended November 30, 2014, senior management at Wave of the Future have

decided to concentrate 4D Entertainments marketing resources on the Pinnacle model and begin to

phase out the Zenith model.

4Ds controller, Tina Wesley, is advocating the use of activity-based costing (ABC) and activity based

management (ABM), and has gathered the following information about the companys manufacturing

overhead costs for the year ended November 30, 2012.

Soldering is based on the number of solder points, shipments based on the number of shipments,

quality control based on the number of inspections, purchase orders based on the number of POs,

machine power based on machine hours, machine setups based on the number of setups.

After completing her analysis, Wesley showed the results to Donald Warden, the 4D Entertainment

Division President. Warden did not like what he saw. If you show headquarters this analysis, they are

going to ask us to phase out the Pinnacle line, which we have just introduced. This whole costing thing

has been a major problem for us. First Zenith was not profitable and now Pinnacle.

Looking at the ABC analysis, I see two problems. We do many more activities than the ones you have

listed. If you had included all activities, maybe your conclusions would have been different. Second, you

used number of setups and number of inspections as allocation bases. The numbers would have been

different had you used setup hours and inspection hours instead. I know that measurement problems

precluded you from using these other cost allocation bases, but at least you ought to make some

adjustments to our current numbers to compensate for these issues. I know you can do better. We cant

afford to phase out either product.

Wesley knew her numbers were fairly accurate. On a limited sample, she had calculated the profitability

of Zenith and Pinnacle using different allocation bases. The set of activities and activity rates she had

chosen resulted in numbers that approximated closely those based on more detailed analyses. She was

confident that headquarters, knowing that Pinnacle was introduced only recently, would not ask 4D

Entertainment to phase it out. She was also aware that a sizable portion of Wardens bonus was based

on division sales. Phasing out either product would adversely affect the bonus. Still, she felt some

pressure from Warden to do something.

4D Entertainment is unsure of the strategies to properly reflect information for their parent company.

The manager would like the following questions addressed as soon as possible:

REQUIRED

1. Using activity-based costing (ABC), calculate the profitability of the Zenith and Pinnacle models. 2. Explain briefly why these numbers differ from the profitability of the Zenith and Pinnacle models

calculated using 4D Entertainments existing costing system.

3. Comment on Wardens concerns about the accuracy and limitations of ABC.

4. How might 4D Entertainment find the ABC information helpful in managing its business?

5. What should Tiny Wesley do?

BackgroundYou are a Consultant for the professional service firm, BUSI 2083 LLP. Your firm specializes in providing awide variety of internal business solutions for different clients. It is your first day on the job and aManager asks you for some help with a client in the Technology & Entertainment sector. Eager to pleaseon your first day, you start reading the background information provided by the Manager.4D Entertainment, a division of Wave of the Future Corporation, manufactures two large-screentelevision models: the Zenith, which has been produced since 2008 and sells for $1,700, and thePinnacle, a new model introduced in early 2008, which sells for $2,200. Based on the following incomestatement for the year ended November 30, 2014, senior management at Wave of the Future havedecided to concentrate 4D Entertainment?s marketing resources on the Pinnacle model and begin tophase out the Zenith model. 4Ds controller, Tina Wesley, is advocating the use of activity-based costing (ABC) and activity based management (ABM), and has gathered the following information about the company's manufacturing overhead costs for the year ended November 30, 2012.Soldering is based on the number of solder points, shipments based on the number of shipments,quality control based on the number of inspections, purchase orders based on the number of PO?s,machine power based on machine hours, machine setups based on the number of setups.After completing her analysis, Wesley showed the results to Donald Warden, the 4D EntertainmentDivision President. Warden did not like what he saw. ?If you show headquarters this analysis, they aregoing to ask us to phase out the Pinnacle line, which we have just introduced. This whole costing thinghas been a major problem for us. First Zenith was not profitable and now Pinnacle.?Looking at the ABC analysis, I see two problems. We do many more activities than the ones you havelisted. If you had included all activities, maybe your conclusions would have been different. Second, youused number of setups and number of inspections as allocation bases. The numbers would have beendifferent had you used setup hours and inspection hours instead. I know that measurement problemsprecluded you from using these other cost allocation bases, but at least you ought to make someadjustments to our current numbers to compensate for these issues. I know you can do better. We can?tafford to phase out either product.?Wesley knew her numbers were fairly accurate. On a limited sample, she had calculated the profitabilityof Zenith and Pinnacle using different allocation bases. The set of activities and activity rates she hadchosen resulted in numbers that approximated closely those based on more detailed analyses. She wasconfident that headquarters, knowing that Pinnacle was introduced only recently, would not ask 4DEntertainment to phase it out. She was also aware that a sizable portion of Warden?s bonus was basedon division sales. Phasing out either product would adversely affect the bonus. Still, she felt somepressure from Warden to do something.4D Entertainment is unsure of the strategies to properly reflect information for their parent company.The manager would like the following questions addressed as soon as possible:REQUIRED1. Using activity-based costing (ABC), calculate the profitability of the Zenith and Pinnacle models. 2. Explain briefly why these numbers differ from the profitability of the Zenith and Pinnacle modelscalculated using 4D Entertainment?s existing costing system.3. Comment on Warden?s concerns about the accuracy and limitations of ABC.4. How might 4D Entertainment find the ABC information helpful in managing its business?5. What should Tiny Wesley do? BackgroundYou are a Consultant for the professional service firm, BUSI 2083 LLP. Your firm specializes in providing awide variety of internal business solutions for different clients. It is your first day on the job and aManager asks you for some help with a client in the Technology & Entertainment sector. Eager to pleaseon your first day, you start reading the background information provided by the Manager.4D Entertainment, a division of Wave of the Future Corporation, manufactures two large-screentelevision models: the Zenith, which has been produced since 2008 and sells for $1,700, and thePinnacle, a new model introduced in early 2008, which sells for $2,200. Based on the following incomestatement for the year ended November 30, 2014, senior management at Wave of the Future havedecided to concentrate 4D Entertainment?s marketing resources on the Pinnacle model and begin tophase out the Zenith model. 4Ds controller, Tina Wesley, is advocating the use of activity-based costing (ABC) and activity based management (ABM), and has gathered the following information about the company's manufacturing overhead costs for the year ended November 30, 2012.Soldering is based on the number of solder points, shipments based on the number of shipments,quality control based on the number of inspections, purchase orders based on the number of PO?s,machine power based on machine hours, machine setups based on the number of setups.After completing her analysis, Wesley showed the results to Donald Warden, the 4D EntertainmentDivision President. Warden did not like what he saw. ?If you show headquarters this analysis, they aregoing to ask us to phase out the Pinnacle line, which we have just introduced. This whole costing thinghas been a major problem for us. First Zenith was not profitable and now Pinnacle.?Looking at the ABC analysis, I see two problems. We do many more activities than the ones you havelisted. If you had included all activities, maybe your conclusions would have been different. Second, youused number of setups and number of inspections as allocation bases. The numbers would have beendifferent had you used setup hours and inspection hours instead. I know that measurement problemsprecluded you from using these other cost allocation bases, but at least you ought to make someadjustments to our current numbers to compensate for these issues. I know you can do better. We can?tafford to phase out either product.?Wesley knew her numbers were fairly accurate. On a limited sample, she had calculated the profitabilityof Zenith and Pinnacle using different allocation bases. The set of activities and activity rates she hadchosen resulted in numbers that approximated closely those based on more detailed analyses. She wasconfident that headquarters, knowing that Pinnacle was introduced only recently, would not ask 4DEntertainment to phase it out. She was also aware that a sizable portion of Warden?s bonus was basedon division sales. Phasing out either product would adversely affect the bonus. Still, she felt somepressure from Warden to do something.4D Entertainment is unsure of the strategies to properly reflect information for their parent company.The manager would like the following questions addressed as soon as possible:REQUIRED1. Using activity-based costing (ABC), calculate the profitability of the Zenith and Pinnacle models. 2. Explain briefly why these numbers differ from the profitability of the Zenith and Pinnacle modelscalculated using 4D Entertainment?s existing costing system.3. Comment on Warden?s concerns about the accuracy and limitations of ABC.4. How might 4D Entertainment find the ABC information helpful in managing its business?5. What should Tiny Wesley do