Problem 5-60 Traditional versus Activity-Based Costing Systems (LO 5-1, 5-2, 5-3, 5-4, 5-5, 5-8)

Gigabyte, Inc., manufactures three products for the computer industry:

Gismos (product G): annual sales, 8,000 units

Thingamajigs (product T): annual sales, 15,000 units

Whatchamacallits (product W): annual sales, 4,000 units

The company uses a traditional, volume-based product-costing system with manufacturing overhead applied on the basis of direct-labor dollars. The product costs have been computed as follows:

	Product G			Product T			Product W
Raw material	$	105.00		$	157.50		$	52.50
Direct labor		48.00	(2.4 hr. at $20)		36.00	(1.8 hr. at $20)		24.00	(1.2 hr. at $20)
Manufacturing overhead*		420.00	($48 875%)		315.00	($36 875%)		210.00	($24 875%)
Total product cost	$	573.00		$	508.50		$	286.50

The calculation of the predetermined overhead rate is as follows:

Manufacturing overhead budget:
Machinery	$	3,675,000
Machine setup		15,750
Inspection		1,575,000
Material handling		2,625,000
Engineering		1,034,250
Total	$	8,925,000

Direct-labor budget (based on budgeted annual sales):

Product G:	8,000			$	48.00		=	$	384,000
Product T:	15,000			$	36.00		=		540,000
Product W:	4,000			$	24.00		=		96,000
Total								$	1,020,000

Predetermined overhead rate =	Budgeted overhead	= 875%
	Budgeted direct labor

Gigabytes pricing method has been to set a target price equal to 150 percent of full product cost. However, only the thingamajigs have been selling at their target price. The target and actual current prices for all three products are the following:

	Product G			Product T			Product W
Product cost	$	573.00		$	508.50		$	286.50
Target price		859.50			762.75			429.75
Actual current selling price		639.00			762.75			600.00

Gigabyte has been forced to lower the price of gismos in order to get orders. In contrast, Gigabyte has raised the price of whatchamacallits several times, but there has been no apparent loss of sales. Gigabyte, Inc., has been under increasing pressure to reduce the price even further on gismos. In contrast, Gigabytes competitors do not seem to be interested in the market for whatchamacallits. Gigabyte apparently has this market to itself.

Required:

1.

Is product G the companys least profitable product?

	Yes
	No

2.

Is product W a profitable product for Gigabyte, Inc.?

	Yes
	No

4.

Gigabytes controller, Nan OSecond, recently attended a conference at which activity-based costing systems were discussed. She became convinced that such a system would help Gigabytes management to understand its product costs better. She got top managements approval to design an activity-based costing system, and an ABC project team was formed. In stage one of the ABC project, each of the overhead items listed in the overhead budget was placed into its own activity cost pool. Then a cost driver was identified for each activity cost pool. Finally, the ABC project team compiled data showing the percentage of each cost driver that was consumed by each of Gigabytes product lines. These data are summarized as follows: (Round Percentage of Total Raw-Material Cost to the nearest whole percentage.)

Activity Cost Pool	Cost Driver	Product G			Product T			Product W
Machinery	Machine hours		24	%		50	%		26	%
Machine setup	Number of setups		22	%		30	%		48	%
Inspection	Number of inspections		16	%		44	%		40	%
Material handling	Raw-material costs		25	%		69	%		6	%
Engineering	Number of change orders		35	%		10	%		55	%

	Show how the controller determined the percentages given above for raw-material costs.

5.	Develop product costs for the three products on the basis of an activity-based costing system. (Round intermediate and final answers to 2 decimal places.)

6.	Based on your answers in the above requirement, calculate a target price for each product, using Gigabytes pricing formula. (Round your intermediate calculations and final answers to 2 decimal places.)