Now you are going to begin to construct and evaluate the ABC system. In order to do this, however, your study of Exhibits 2 and 3 should have told you that you are going to have to convert the information the company currently measures into the information you need for the ABC analysis.

Q1 First, how many raw material orders did the company receive for each model?

Q2 How many batches of each model did the company pack and ship?

Q3 How many machine setups does IMI do for each model?

Q4 Calculate a rate for each activity in Exhibit 2. (Activity rate = overhead rate.)

Q5 Use the rates calculated in Q8 to apply overhead to each product line: ISUS 1000 and ISUS 2020.

Q6 Calculate the overhead per computer (one unit) for a ISUS 1000 and a ISUS 2020.

Q7 Calculate the total manufacturing cost of ONE ISUS 1000 and ONE ISUS 2020 using ABC overhead allocation.

Q8 Show how the company would determine a selling price for each model under the ABC system, and assuming theyd continue their current mark-up policy.

Q9 Should Ivan adopt an ABC system for internal analysis? Your answer should address the question very specifically to this case no generalities about ABC from the book. It should contain two points in favor of ABC, and two drawbacks that he should be aware of. Note that Its more accurate is not a complete answer in favor. You can do better than that, explaining what makes it more accurate. Be aware, also, that pricing isnt an exact science: the company isnt bound by law or accounting principles to charge a certain price.

CASE 1 ISUS MANUFACTURING, INC. "I feel like we are constantly charging less than some others in the market. Our pricing policy is pretty simple: we mark up our full manufacturing cost by 50%. That means a computer that costs us $2,000 to manufacture will sell for $3, ooo. Until now I thought this was a workable approach, but now I'm not so sure." Ivan Steel, CEO, Isus Manufacturing, Inc. (IMI) Ivan's Controller, Suzzie, had just told him that she believed the computers might be priced inappropriately. Ivan continued: "When I was at college, I focused most of my attention on operations and marketing, convinced that those were the keys to my successful career. Cost accounting was boring and not relevant. But now my accountant is telling me that I need to think about a new way to assign manufacturing overhead to products, and I don't even know where to start! I never dreamed that some-day my career would come to this. I wish I'd paid more attention to those classes so I could understand what is going on here. I'm lost." BACKGROUND IMI manufactures several different computer models, distributed to retail outlets throughout the 50 states. The company specializes in user-friendly computers and is proud of their graphics capability. IMI claims the superb graphics are what distinguish its products from competitors. IMI purchases raw materials in components and subassemblies made to its specifications, from a very small group of highly reliable suppliers. It uses a single facility to house both manufacturing facility and administrative and sales offices. The factory workers operate three kinds of machines. Inspecting machines check the raw materials and test components and subassemblies to assure they are working to specifications. Soldering machines solder various components as necessary. Finally, assembly machines put all the components and subassemblies together into finished computers. The processes can vary by computer model. About 40\% of IMI's overhead cost consists of depreciation, maintenance, and repairs on the three types of manufacturing machines used in the factory. The remainder of the overhead is made up of labor involved in receiving and handling the raw materials, adjusting, and setting up machines for each new batch of computers, and inspecting and packing finished computers for shipping, with some small amount of overhead for miscellaneous factory-related costs. Additional costs include insurance and depreciation on handling equipment, supplies, and utilities. The actual manufacturing effort (soldering, inspecting and assembly) is primarily automated, so IMI uses very little direct labor. The company also operates on a lean production model, so almost no inventories exist at the end of any period. Most of the computers are sold in large orders to national electronic retail chains. However, the ISUS 2020 is not such a machine. It represents a recent effort by IMI to enter the scientific computing market. The quantity manufactured and sold of ISUS 2020 , and similar machines is expected to be much lower than other models even when it gains its planned market share. Fewer customers exist for such a sophisticated, powerful, high-priced machines. Nonetheless, Ivan has believed from the conception of this product that, when all manufacturing costs were considered, these specialty computers would contribute a reasonable amount to IMI's selling and administrative costs and profit. The name recognition from the elite scientific community should enhance sales of the more generally used computers. FINANCIAL INFORMATION IMI budgeted direct labor costs for 2022 at $60,000,000. Based on expected sales, the company estimated that raw material purchased and used would be $300,000,000. Manufacturing overhead was budgeted at $196,000,000. Overhead is currently allocated to production on the basis of machine hours (MH). As mentioned above, computers are priced at full production cost plus a mark-up of 50%. EXHIBIT 1 shows the expected direct manufacturing costs for two of the company's several computers. The ISUS 100o is a very popular computer with large production and sales volume. By contrast, the ISUS 2020, described above, is a state-of-the-art scientific computer with several special features. In particular, the ISUS 2020 a. Uses a new processing chip imported from Sweden. b. Has special patented random-access memory (RAM) that gives it extremely high input/output speed. c. Is manufactured in very small batches to assure uniform quality from one computer to the next, to satisfy the users of the machines who have very high expectations for the performance of the machines they purchase. Ivan's concerns arose when Suzzie told him that she thought the company's traditional overhead allocation system was providing misleading cost information about the different types of products, especially the specialty computers. She developed an analysis of the 2022 manufacturing overhead costs (discussed above), shown in EXHIBIT2.She classified the overhead costs described above into activities. She also gathered data, shown in EXHIBIT3, for the 2022 production of the ISUS 1000 and the ISUS 2020, as two representative examples, a large-volume and a specialty computer, of her point. Ivan commented on the data: "I don't know quite what to make of all this. I guess what I really need is some sense of what the true manufacturing cost of each computer is. I thought I knew that, but I guess I really didn't. Maybe I need to go back to school!" IBIT 2 Anahreic of onss Rudatod Mamifasthrina Mrorhoad Cocte EXHIBIT 3 Production Data for ISUS 1000 and ISUS 2020 * "Received order size" is the number of computers one order of raw materials will build. Example: (Refer to above.) The company receives 2 orders of raw materials for the ISUS 1000 per year. Calculation: 2 o,ooo computers produced per year, divided by 1o,ooo computers' worth of raw materials in each order = 2 orders per year. CASE 1 ISUS MANUFACTURING, INC. "I feel like we are constantly charging less than some others in the market. Our pricing policy is pretty simple: we mark up our full manufacturing cost by 50%. That means a computer that costs us $2,000 to manufacture will sell for $3, ooo. Until now I thought this was a workable approach, but now I'm not so sure." Ivan Steel, CEO, Isus Manufacturing, Inc. (IMI) Ivan's Controller, Suzzie, had just told him that she believed the computers might be priced inappropriately. Ivan continued: "When I was at college, I focused most of my attention on operations and marketing, convinced that those were the keys to my successful career. Cost accounting was boring and not relevant. But now my accountant is telling me that I need to think about a new way to assign manufacturing overhead to products, and I don't even know where to start! I never dreamed that some-day my career would come to this. I wish I'd paid more attention to those classes so I could understand what is going on here. I'm lost." BACKGROUND IMI manufactures several different computer models, distributed to retail outlets throughout the 50 states. The company specializes in user-friendly computers and is proud of their graphics capability. IMI claims the superb graphics are what distinguish its products from competitors. IMI purchases raw materials in components and subassemblies made to its specifications, from a very small group of highly reliable suppliers. It uses a single facility to house both manufacturing facility and administrative and sales offices. The factory workers operate three kinds of machines. Inspecting machines check the raw materials and test components and subassemblies to assure they are working to specifications. Soldering machines solder various components as necessary. Finally, assembly machines put all the components and subassemblies together into finished computers. The processes can vary by computer model. About 40\% of IMI's overhead cost consists of depreciation, maintenance, and repairs on the three types of manufacturing machines used in the factory. The remainder of the overhead is made up of labor involved in receiving and handling the raw materials, adjusting, and setting up machines for each new batch of computers, and inspecting and packing finished computers for shipping, with some small amount of overhead for miscellaneous factory-related costs. Additional costs include insurance and depreciation on handling equipment, supplies, and utilities. The actual manufacturing effort (soldering, inspecting and assembly) is primarily automated, so IMI uses very little direct labor. The company also operates on a lean production model, so almost no inventories exist at the end of any period. Most of the computers are sold in large orders to national electronic retail chains. However, the ISUS 2020 is not such a machine. It represents a recent effort by IMI to enter the scientific computing market. The quantity manufactured and sold of ISUS 2020 , and similar machines is expected to be much lower than other models even when it gains its planned market share. Fewer customers exist for such a sophisticated, powerful, high-priced machines. Nonetheless, Ivan has believed from the conception of this product that, when all manufacturing costs were considered, these specialty computers would contribute a reasonable amount to IMI's selling and administrative costs and profit. The name recognition from the elite scientific community should enhance sales of the more generally used computers. FINANCIAL INFORMATION IMI budgeted direct labor costs for 2022 at $60,000,000. Based on expected sales, the company estimated that raw material purchased and used would be $300,000,000. Manufacturing overhead was budgeted at $196,000,000. Overhead is currently allocated to production on the basis of machine hours (MH). As mentioned above, computers are priced at full production cost plus a mark-up of 50%. EXHIBIT 1 shows the expected direct manufacturing costs for two of the company's several computers. The ISUS 100o is a very popular computer with large production and sales volume. By contrast, the ISUS 2020, described above, is a state-of-the-art scientific computer with several special features. In particular, the ISUS 2020 a. Uses a new processing chip imported from Sweden. b. Has special patented random-access memory (RAM) that gives it extremely high input/output speed. c. Is manufactured in very small batches to assure uniform quality from one computer to the next, to satisfy the users of the machines who have very high expectations for the performance of the machines they purchase. Ivan's concerns arose when Suzzie told him that she thought the company's traditional overhead allocation system was providing misleading cost information about the different types of products, especially the specialty computers. She developed an analysis of the 2022 manufacturing overhead costs (discussed above), shown in EXHIBIT2.She classified the overhead costs described above into activities. She also gathered data, shown in EXHIBIT3, for the 2022 production of the ISUS 1000 and the ISUS 2020, as two representative examples, a large-volume and a specialty computer, of her point. Ivan commented on the data: "I don't know quite what to make of all this. I guess what I really need is some sense of what the true manufacturing cost of each computer is. I thought I knew that, but I guess I really didn't. Maybe I need to go back to school!" IBIT 2 Anahreic of onss Rudatod Mamifasthrina Mrorhoad Cocte EXHIBIT 3 Production Data for ISUS 1000 and ISUS 2020 * "Received order size" is the number of computers one order of raw materials will build. Example: (Refer to above.) The company receives 2 orders of raw materials for the ISUS 1000 per year. Calculation: 2 o,ooo computers produced per year, divided by 1o,ooo computers' worth of raw materials in each order = 2 orders per year