Required:

1. Determine the product cost per unit for both CD107 and CD635 using the existing cost accounting system 10 marks

2. Determine the product cost per unit for the 2 products using the proposed activity-based costing system. 10 marks

3. Explain why the product costs are different under the 2 cost accounting systems. Your explanation should be in language that the marketing and production managers can understand. Write around 200 words 15 marks

4. What suggestions do you have to make this business more profitable? Write around 300 words. 15 marks

Minihaha Case Zenon manufactures low price but high quality tablets. Two products are manufactured and sold: CD 1 and CD 6. CD1 has won awards in international comparisons against higher priced rival brands for its speed, processing capabilities as well as attractive case. CD6 is the lower priced tablet which is gaining market share because of the reputation of CD1. Sue Wong, CEO, is wanting an analysis of each product's profitability. The previous accountant, Mike Pitowski, prepared the traditional cost accounting reports using Exhibit One. Mike used the traditional two stage costing system to compute the product profitability for CD1 and CD6. The cost driver was labour hours. The product profitability under the traditional costing system is found in Exhibit Two. CD1 has a profit of $10.63 per unit while CD6 makes a loss of $0.83 per unit. . Since Mike left in early January 2016, external consultants, Sally Allknow Consultants, undertook an activity based management study and created Exhibit Three. Sally Allknow has computed the new profitability for each of the products in Exhibit Four. CD1 is now making a loss of $2.32 per unit while CD6 is making a profit of $16.43 per unit. Your report shall comprise: 1. An executive summary (around 200 words). The executive summary is an excellent summary of the key points of the main report. The problems are clearly identified, the alternatives are developed and the recommendation clearly addresses the problems. 2. The main report is around 800 words. There are two parts to the main report: a. Sue Wong wants to know how two costing systems can give such different product profitability. Evaluate each costing system (traditional two stage AND activity based costing) and explain fully the reasons for the differences. Your report should be in language that the marketing and production managers can understand (400 words) b. Zenon now uses your evaluation to make decisions. Identify four alternative decisions that Sue Wong, CEO, needs to consider with her marketing and production managers. Recommend how management accounting can be used for each decision to make this business more profitable. (400 words) The following information is useful for your report. The company has established the following 3 cost pools for its manufacturing overheads: Cost Pool Manufacturing Overhead S $640,000 P1 400,000 P2 200,000 Total $1,240,000 Pool S includes all support activity costs at the plant. P1 and P2 include overhead costs traced directly to the 2 production departments, fabrication (P1) and assembly (P2). The current cost accounting system at the plant employs a two stage cost allocation method that first allocates overhead costs in pool S to the pools P1 and P2 on the basis of machine hours and then assigns the accumulated overhead costs in the pools P1 and P2 to the 2 products on the basis of direct labour hours. A separate overhead rate is computed for each of the 2 production departments. The direct labour wage rate including benefits, is $15 per hour. The following information is made available: Exhibit 1 contains the information for the traditional costing system (and some of the activity costing information. Exhibit One: Department Fabrication (P1) Assembly (P2) Total Direct Labour Department Fabrication (P1) Assembly (P2) Total Sales price per unit Direct material cost per unit Units Produced and Direct Labour Hours (DLH) CD1 CD6 Total 20,000 20,000 40,000 25,000 15,000 40,000 45,000 35,000 80,000 $ Machine Hours (MH) CD1 CD6 Total 27,000 18,000 45,000 20,000 15,000 35,000 47,000 33,000 80,000 CD1 $260 $80 8,000 CD6 $220 $40 6,000 Mike Pitowski used the traditional two stage costing system to compute the product profitability for CD1 and CD6. The cost driver was labour hours. The product profitability under the traditional costing system is found in Exhibit Two. Exhibit Two Traditional Two Stage Costing System Stage One Allocation Department P1 Department P2 Directly identified overhead 400,000 200,000 Allocated from S 360,000 280,000 Total Overhead 760,000 480,000 DLH 40,000 $ 19.00 per labour hour 40,000 Allocated from CD1 CD6 Department P1 $ Overhead Rate per DLH $ 12.00 Stage Two Allocation: Department P2 380,000 $ 380,000 300,000 180,000 Total Overhead $ 680,000 $ 560,000 Direct Material $ 640,000 $ 240,000 Direct Labour $ 675,000 $ 525,000 Overhead $ 680,000 $ 560,000 Total Cost $ 1,995,000 $ 1,325,000 Number of Units Unit Cost 8,000 $ 6,000 249.38 Sales Price Gross Margin $ 220.83 $260 $220 $10.63 -$0.83 In January 2016, a team of highly paid consultants, Allknow Consultants, undertook an activity based management study and created Exhibit Three Exhibit Three: Activity Cost Drivers P1 - DLH P2 - DLH P1 - MH P2 - MH Setup Hours Total Existing Overhead S Cost $ 40,000 150,000 50,000 60,000 340,000 640,000 Total $ P1 40,000 110,000 250,000 400,000 $ P2 80,000 40,000 80,000 200,000 $ $ $ $ $ $ 80,000 230,000 160,000 100,000 670,000 1,240,000 The number of setups in January 2016 was 1,000 for each of the 2 products, but each setup for CD1 takes twice as long as a setup for CD6. . The leader of the consultants, Sally Allknow, has compiled the information contained in the spreadsheet as Exhibit Three, to reassign the overhead costs for June 2016 from the existing overhead cost pools (S, P1, P2) to 5 new activity cost pools. Sally computed the new profitability for each of the products in Exhibit Four. Exhibit Four Cost Driver: CD1 CD6 P1 - DLH 40,000 40,000 P2 - DLH 143,750 86,250 P1 - MH 96,000 64,000 P2 - MH 57,143 42,857 446,667 223,333 $ 783,560 $ 456,440 $ 640,000 $ 240,000 Direct Labour 675,000 525,000 Overhead 783,560 456,440 Total Cost 2,098,560 1,221,440 8,000 6,000 Unit Cost $ 262.32 $ 203.57 Sales Price $ $ Setup Hours Total Product Costings: Direct Material Number of Units Gross Margin 260 -$2.32 220 $16.43