PART 2: ABC and ABM (30 Points)

Franklin Fireplace Inserts manufactures two premium models of fireplace inserts that provide more BTUs of heat per cord of wood than any other wood burning fireplace insert or stove.One model, the Heatilator, sells for $1,800, and the Heat Queen, a new model that sells for $1,200.Franklin's marketing department suggested that the company should concentrate on the new Heat Queen model and begin to phase out the Heatilator model.

Franklin currently uses a traditional costing system. The following cost information has been used as a basis for pricing decisions over the past year.

Per-Unit Data

Heatilator

Heat Queen

Direct materials

$200

$280

Direct labor hours

1.5

1.5

Machine hours

5

4

Units produced

11,000

4,000

Direct labor cost is $20 per hour, and the machine usage cost is $18 per hour. Manufacturing overhead costs were estimated at $4,800,000 and were allocated on the basis of machine hours.

Gwen Freely, the new company controller, suggested that an activity-based costing analysis first be performed to obtain a better picture of the true manufacturing cost. The following data were collected:

Activity Center

Cost Driver

Traceable Costs

Soldering

Number of solder joints

$942,000

Shipments

Number of shipments

860,000

Quality control

Number of inspections

1,240,000

Purchase orders

Number of orders

950,400

Machining

Machine hours

57,600

Machine setups

Number of setups

750,000

Total traceable costs

$4,800,000

Number of Events during the year:

Activity

Heatilator

Heat Queen

Total

Soldering

296,250

96,250

392,500

Shipments

4,050

950

5,000

Quality control

14,050

5,325

19,375

Purchase orders

20,025

27,495

47,520

Machining

44,000

4,000

48,000

Machine setups

4,000

3,500

7,500

Selling, general, and administrative costs per unit sold are $175.00 for Heatilator and $125 for Heat Queen.

A.Calculate the manufacturing cost per unit for Heatilator and Heat Queen under:

a.A traditional costing system

b.The ABC system

B.Explain the differences in manufacturing cost per unit calculated in part (A).

C.Which system would most likely do

better job of measuring costs for this product emphasis/keep or drop decision?Explain.

D.Franklin's controller points out that the ABC information could also be used to identify and eliminate non-value-added activities.Explain how ABC and ABM can be used for this purpose