Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

CASE STUDY 4 - 1 : TRADITIONAL versus ABC COSTING Top - Line Suitcases manufactures three lines of suitcases from basic to deluxe to heavy

CASE STUDY 4-1: TRADITIONAL versus ABC COSTING
Top-Line Suitcases manufactures three lines of suitcases from basic to deluxe to heavy-duty. The company uses a traditional job-order 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 $115, yet this is the cost of the basic suitcase for Top-Line. 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 The new CFO anxiously responded I think your job-order costing system is outdated and distorting product costs. The president requested an analysis of alternative product-costing systems.
In her analysis, the CFO compared the traditional job-order costing system with an activity-based costing system. She determined three manufacturing overhead activity cost pools:
Cost Pool Cost Driver Product Line Breakdown
Basic Deluxe Heavy-Duty
Purchasing # of purchase orders 48%10%42%
Maintenance # of machine hours 40%12%48%
Inspection # of inspections 45%10%45%
REQUIRED:
1) 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 job-order costing system currently used by Top-Line Suitcases. 10 points
- $3925000/28000 hrs= $190 per Direct Labor hours
2) Calculate the unit cost for each product line using the activity-based costing system. 10 points
3) Top-Line Suitcases prices its suitcases at 110% of product cost. Assuming the CFO has decided to keep this formula, determine the target price for each product under both methods, traditional and activity-based systems. 10 points
4) Assume you are the CFO. Write a memo to the company president explaining your analysis including your recommendation for target pricing. 10 points
Basic Model Deluxe Model Heavy Duty Model
Annual Sales (in units)20,0001,00010,000
Selling Price per unit $120 $215 $280
Product Costs:
Raw Material $10 $25 $42
Direct Labor ($20/hour) $10
Manufacturing Overhead $85
Total Product Costs $115
Direct Labor Budget (in hours)10,000 hours 800 hours 10,000 hours
Manufacturing Overhead Budget:
Purchasing $257,000
Maintenance $1,780,000
Inspections $1,915,000
$3,952,000

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Just In Time Accounting How To Decrease Costs And Increase Efficiency

Authors: Steven M. Bragg

3rd Edition

0470403721, 978-0470403723

More Books

Students also viewed these Accounting questions