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CASE STUDY 4 - 1 : TRADITIONAL versus ABC COSTING Top - Line Suitcases manufactures three lines of suitcases from basic to deluxe to heavy
CASE STUDY : TRADITIONAL versus ABC COSTING
TopLine Suitcases manufactures three lines of suitcases from basic to deluxe to heavyduty. The company uses a traditional joborder costing system with manufacturing overhead allocated based on direct labor hours.
The company has been losing market share. Upon analysis, the basic model was overpriced compared to competitors. Competitors were selling basic suitcase for $ yet this is the cost of the basic suitcase for TopLine. The company president said how can our competitors sell for this price? What are we doing wrong? The new CFO anxiously responded I think your joborder costing system is outdated and distorting product costs. The president requested an analysis of alternative productcosting systems.
In her analysis, the CFO compared the traditional joborder costing system with an activitybased costing system. She determined three manufacturing overhead activity cost pools:
Cost Pool Cost Driver Product Line Breakdown
Basic Deluxe HeavyDuty
Purchasing # of purchase orders
Maintenance # of machine hours
Inspection # of inspections
REQUIRED:
Calculate the traditional predetermined overhead rate with manufacturing overhead allocated based on direct labor hours.
a Calculate the unit cost for each product line using the traditional joborder costing system currently used by TopLine Suitcases. points
$ hrs $ per Direct Labor hours
Calculate the unit cost for each product line using the activitybased costing system. points
TopLine Suitcases prices its suitcases at of product cost. Assuming the CFO has decided to keep this formula, determine the target price for each product under both methods, traditional and activitybased systems. points
Assume you are the CFO. Write a memo to the company president explaining your analysis including your recommendation for target pricing. points
Basic Model Deluxe Model Heavy Duty Model
Annual Sales in units
Selling Price per unit $ $ $
Product Costs:
Raw Material $ $ $
Direct Labor $hour $
Manufacturing Overhead $
Total Product Costs $
Direct Labor Budget in hours hours hours hours
Manufacturing Overhead Budget:
Purchasing $
Maintenance $
Inspections $
$
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