Doble Tech Bel Corporation (CTB) operates in the telecommunications Industry, CTB has two divisions the Phone Division and the Cable Service Division. The Phone Division manufactures telephones in several plants located in the Midwest. The product lines run from relatively expensive touch-tone wall and desk phones to expensive, high-quality coluar phones. CTB also operates a cable TV service in China. The Cable Service Division offers three products: a basic package with 25 channes; an enhanced package, which is the basic package plus 35 additional channels and two movie channels; and a premium package which is the basic package plus 55 additional channels and six movie channels. Cable Service Dion reported the following activity for the month of March Basie Enhanced Premium 50,000 500,000 300,000 stunts) rice per unit $32 $60 $90 Unit costs Directly traced 36 $18 $36 Driver traced $4 S8 $12 Alocated $20 $26 $30 The unit costs are avided as follows: 70 percent production and 30 percent marketing and customer service. Direct labor cost is the only driver used for trang. Typicaly, the division uses only production cout to define unit costs. The preceding unit product cost information was provided at the request of the marketing manager and was the result of a special study. Bryce Youngers, the president of CTB, is reasonably satisfied with the performance of the Cable Service Division March's performance is fairly typical of what has been happening over the past two years. The Phone Division, however, is another matter. Its overall profit performance has been declining. Two years ago, income before income taxes had been about 25 percent of sales. March's dismal performance was as typical for what has been happening this year and is expected to continue unless some action by management is taken to reverse the trend. During March, the Phone Division reported the following results Inventories: Materials, March 1 Materials, March 31 $23,000 40,000 Work in process, March 1 130,000 work in process, March 31 45,000 480,000 Finished goods, March 1 Fished goods, March 31 375,000 Cast: $117,000 Direct labor Check My Work Emainstructor Save and Ex Som Assignment for Grading Brycel Jacob, I need more explanation. We have been using the same cost accounting system for the last 10 years. Why would it be a problem? Jacob "I think that our manufacturing environment has changed. Over the years, we have added a lot of different product lines. Some of these products make very different demands on manualuring verhad sources. We trace or attempt to trace-overhead costs to the different products using direct labor cost, a unt-based cost driver. We may be doing more location than tracing. If so, that tably don't have a very good dea of our actual product costs. Also, as you know, with the way computer technology has changed over time, it is easier and cheaper to collect and use desi indomation Formation that will allow us to sign costs more accurately Bryce: This may be something we should explore. Jacob, what do you suggest? Jacob.at we want more accurate product costs and it we really want to get in the cost reduction business, then we need to understand how costs behave. In particular, we need to understand activity cust hver. Knowing what activities we perform, why we perform them, and how well we perform them will help us identify areas for improvement. We also need to know how the different products consume adityources. What this boils down to is the need to use an activity-based management system. But before we jump into this, we need some idea of whether non-une-based drivers and anything Activity Dared management is not an inexpensive undertaking. So I suggest that we do a preliminary study to see if direct labor cost is adequate for tracing. If not, then maybe some non-unit-crivers might be needed. In fact, you would like to gather some data that will provide some evidence on the usefulness of the activity based approach." Bryce: "What do you think, om it's your division." Kim What Incob has said sounds promising, I think he should pursue it and do so quickly. I also think that we need to look at improving our quality. I sounds like we have a problem there. If quality could be improved, then our costs will erop. I'll talk to our quality people. Iacob, in the meantime, fed out for us it moving to an activar-based system is the way to go. How much time do you need Jacob: "I have already been gathering data. I could probably have a report within two weeks." MEMO TO: Kim Breases Jacob Carder FROM: SUBJECT: Preliminary Analysis Based on my initial analysis, I am confident that an ABC system will offer significant improvement for one of our conventional phone plants regressed total monthly overhead cost on many direct labor cout using the following 15 months of data: Overhead Direct Labor Cost $350,000 $110,000 300.000 100,000 350,000 90,000 400,000 100,000 320,000 90.000 350.000 100,000 100,000 250,000 340.000 90,000 90.000 95,000 115,000 100.000 410.000 175.000 360,000 340,000 330,000 300,000 85.000 85.000 90.000 80,000 The results were revealing. Although direct labor cost appears to be a driver of overhead cost, it really doesn't explain a lot of the variation. I then searched for other drivers-particularly out drivers that mit offer more insight into warhead cost behavior. Every time a batch is produced, material movement ou regardless of the site of the batch. The number of moves seemed like more logical driver. 1 was able to gather only 10 months of data for this. (Our information system doesn't provide the number of moves, so I had to build the data set by interviewing production personnel) This information is provided next Material Handling Cost Number of Moves $80,000 1,500 1,000 60,000 70,000 72,000 1,250 1,300 65,000 1,100 95.000 1.700 1,200 $7,000 72,500 83,000 1.350 1,400 14,000 1,700 The regres results were ingressive. There is no question in my mind that the number of moves is a good driver of materials handling costs. Using the number of moves to assign materiellanding costs 10 products would he be better than the cont assignment using direct or cow. Furthermore, since mal benches the number of wave warge batches we have a widence that we may be terting our high-volume products kom, you expressed the desire of reducing the costs of inspection, reworking, and warranties. In addition to the plot study for one plant, I also collected information about these teave for the on For the inspection activity, we have 15 inspectors who are paid an average of $4,000 per month. Each inspector offers a practical inspection capacity of 2,000 hours per year. However, it appears that inspectors actually work only about so percent of these hours Rework cow smoly the cost of replacing some faulty components and the associated direct labor. The rework cost per unit is predictable and constant per regardless of the product model. Warranty cost, on the other hand, involves the series of two technicians, with the remaining cou, the cost of replacement components, which is relatively constant per Sunt repared. The technicians are paid 5.000 per month and provide 2.000 hours of service per year. Warranty service aty requires 3,600 technician hours per var After receiving the memo, Kim was intrigued, both by the activity based costing pilot study and by the potencial savings for the division by improving quality. She then asked Jacob to use the same prone plant a plot for a pronary Anc analysis. She instructed him to assign all overhead couts to the plant's two products (Regular and Deluxe models), using only four activities. The tour acts were rework moving materials, pecting products, and a general catch all activity thered the manufacturing activities. From the social study ready performed, she knew that matter handling and pecting involved significant costs from production reports, she also knew that the rework activity involved wgnificant cost. If the ABC and unit-based cost assignments did not differ by breaking out these three major tivities, then ABC may not matter. Pursuant to the request. Jacob produced the following cost and driver Information Activity Expected Cost Driver Activity Capacity Other activities $2,000,000 Direct labor dollar $1,250,000 Moving materials 900.000 Number of moves 18.000 Inspecting 720,000 Inspection hours 24,000 Rewarking 380,000 Rework hours 3,00 Total overhead cost 14,000,000 Expected activity demands Regular Model Deluxe Model 100,000 Units completed Direct labor dotar 40,000 $375,000 3875,000 Number of moves 7,200 10,000 Inspect hours 6,000 18,000 Rework hours 1,900 1,900 Required: d. Assume that quality improves so that the current demand for the output of the inspection, work, and warranty activities drops by 50 percent (with the Phone Division Bouring savings possible by reducing the resources currently used by the activities). Calculate the increase in March's pre-tax operating income produced by the savings March income would increase by the amount is 6. Using the data generated by Jacob's pilot for a preliminary ABC analysis answer the following: a. Calculate the overhead cost per unit for each phone model using direct labor cost to assign all overhead costs to products (round overhead rate to two decimal places) Overhead Cost per Unit Regular Deluxe b. Calculate the overhead cost per unit for each phone model using the four activities and drivers identified by Jacob (round activity rates to two decimal places). Activity Rates Other: per direct labor dollar Moving per move Inspecting per inspection hour Reworking: per rework hour Unit Cost Regular Deluxe c. Using the ABC assignments as the benchmark, the unit manufacturing cost for the Regular model is currently overstated by d. If the unit product cost of the Regular model is overstated then the selling price could be decreased making the company more competitive 7. Suppose that Jacob learned about duration-based costing after completing the pilot study. According to the plant manager of the phone plant used for the pilot study, the cycle time for the Regular model 0.50 hours and that of the Deluxe model is one hour. Calculate the unit cost for each model using duration-based costing The unit costs of the Regular Models is The unit costs of the Deluxe Models is How do unit costs compare to the ABC costs