P8.39 LO8.3 8.5 8.6 Activity-based costing product decisions: manufacturer Territory Electronics Company (TEC) manufactures two large-screen television models, the Novelle, which has been produced for 10 years and sells for $910, and the Zodiac, a new model which sells for $1160. Based on the income statement for the year just ended, presented below, a decision has been made to concentrate TEC's marketing resources on the Zodiac model and to begin to phase out the Novelle model. Territory Electronics Company Income statement Zodiac Novelle Total Sales $4640000 $20020000 $24660000 Cost of goods sold 3232000 13024000 16256000 Gross margin $1408000 S 6996000 S 8401000 Selling and administrative expenses 980000 570000 6680000 Net profit S428000 $ 1296000 $ 1724000 Units produced and sold 4000 22000 Net profit per unit sold $ 107.00 s 58.91 Rounded The unit costs for the Zodiac and Novelle modes are as follows: Zodiac Novelle $363 S65S Direct material Direct labour Zodiac (3.5 hr X S14) 49 Net profit 228000 S 1724000 Units produced and sold Net profit per unit sold - Rounded 4000 $ 107.00 $ 1296000 22000 $ 58,91 The unit costs for the Zodiac and Novelle models are as follows: Novelle $363 Zodiac Direct material $655 Direct labour: Zodiac (3.5 hr 514) 49 Novelle (1.5 hr x $14) Manufacturing overhead 104 Cost per unit $808 Manufacturing overhead was applied on the basis of machine hours at a predetermined rate of $26 per hour. 21 208 $592 398 PART TWO COSTS AND COSTING SYSTEMS Territory Electronics Company's financial controller is advocating the use of activity-based costing and has gathered the following information about the company's manufacturing overhead costs for the year just ended: Quantity of activity driver consumed Territory Electronics Company's financial controller is advocating the use of activity-based costing and has gathered the following Information about the company's manufacturing overhead costs for the year just ended: Activity (activity driver) Soldering (number of solder joints) Shipments (number of shipments) Quality control (number of inspections) Purchase orders (number of orders) Machine power (machine hours) Machine setups (number of setups) Total activity costs Activity costs $ 880000 836000 1170000 1110000 47500 948 500 $4992000 Quantity of activity driver consumed Zodiac Novelle Total 400000 1 200000 1600000 3800 15200 19000 21060 56940 78000 105 450 79550 185000 15200 174800 190000 4500 4985 9485 Required: 1. Briefly explain how an activity-based costing system operates. 2. Using activity-based costing, determine whether TEC should continue to emphasise the Zodiac model and phase out the Novelle model Question 1: Langfield-Smith Chapter 8: P8.39 First: Please answer the above question "P8.39" from your textbook. Second: Additional Questions: (a) Construct an excel spreadsheet to help solve P8.39 by determining the cost of each product line using an ABC system. (Costs are: $4,605,600 and $11,650,400) (b) Briefly discuss other qualitative issues (i.e. issues that are hard to quantify) Territory Electronics Company should consider when deciding on whether to continue or discontinue a product line. (c) Discuss how Territory Electronics Company can use ABC information to initiate process improvement. P8.39 LO8.3 8.5 8.6 Activity-based costing product decisions: manufacturer Territory Electronics Company (TEC) manufactures two large-screen television models, the Novelle, which has been produced for 10 years and sells for $910, and the Zodiac, a new model which sells for $1160. Based on the income statement for the year just ended, presented below, a decision has been made to concentrate TEC's marketing resources on the Zodiac model and to begin to phase out the Novelle model. Territory Electronics Company Income statement Zodiac Novelle Total Sales $4640000 $20020000 $24660000 Cost of goods sold 3232000 13024000 16256000 Gross margin $1408000 S 6996000 S 8401000 Selling and administrative expenses 980000 570000 6680000 Net profit S428000 $ 1296000 $ 1724000 Units produced and sold 4000 22000 Net profit per unit sold $ 107.00 s 58.91 Rounded The unit costs for the Zodiac and Novelle modes are as follows: Zodiac Novelle $363 S65S Direct material Direct labour Zodiac (3.5 hr X S14) 49 Net profit 228000 S 1724000 Units produced and sold Net profit per unit sold - Rounded 4000 $ 107.00 $ 1296000 22000 $ 58,91 The unit costs for the Zodiac and Novelle models are as follows: Novelle $363 Zodiac Direct material $655 Direct labour: Zodiac (3.5 hr 514) 49 Novelle (1.5 hr x $14) Manufacturing overhead 104 Cost per unit $808 Manufacturing overhead was applied on the basis of machine hours at a predetermined rate of $26 per hour. 21 208 $592 398 PART TWO COSTS AND COSTING SYSTEMS Territory Electronics Company's financial controller is advocating the use of activity-based costing and has gathered the following information about the company's manufacturing overhead costs for the year just ended: Quantity of activity driver consumed Territory Electronics Company's financial controller is advocating the use of activity-based costing and has gathered the following Information about the company's manufacturing overhead costs for the year just ended: Activity (activity driver) Soldering (number of solder joints) Shipments (number of shipments) Quality control (number of inspections) Purchase orders (number of orders) Machine power (machine hours) Machine setups (number of setups) Total activity costs Activity costs $ 880000 836000 1170000 1110000 47500 948 500 $4992000 Quantity of activity driver consumed Zodiac Novelle Total 400000 1 200000 1600000 3800 15200 19000 21060 56940 78000 105 450 79550 185000 15200 174800 190000 4500 4985 9485 Required: 1. Briefly explain how an activity-based costing system operates. 2. Using activity-based costing, determine whether TEC should continue to emphasise the Zodiac model and phase out the Novelle model Question 1: Langfield-Smith Chapter 8: P8.39 First: Please answer the above question "P8.39" from your textbook. Second: Additional Questions: (a) Construct an excel spreadsheet to help solve P8.39 by determining the cost of each product line using an ABC system. (Costs are: $4,605,600 and $11,650,400) (b) Briefly discuss other qualitative issues (i.e. issues that are hard to quantify) Territory Electronics Company should consider when deciding on whether to continue or discontinue a product line. (c) Discuss how Territory Electronics Company can use ABC information to initiate process improvement