Solution Required: a) Calculate profits and profit margin, analysed by product, using the present (machine hour absorption) costing system. Current costing system (absorbing overheads on machine hours) b) Calculate profits and profit margin, analysed by product, using activity based costing system. Proposed Activity-based costing system: b) Calculate overhead rates for each activity pool, profits and profit margin, analysed by product, using activity based costing system. c) Explain any evidence you find to support your suspicious that the present product costing system is flawed. d. Compare the costing between the two systems, John Gardiner, a skilled carpenter, set up BedTab Limited to produce a self-assembly bed, the Stable. A few years later he introduced the Net, also a self-assembly bed, and for several years BedTab achieved steady growth in turnover and profits selling the two beds. Increased competition in the self-assembly bed forced John to design the Day, a more complex, adjustable bed but sill in assembly form. The Day has proved a success, its sales increasing as the demand of the Stable and Net declined. Moreover the Day continues to sell surprisingly well despite a recent price increase. Ongoing demand for the Stable and the Net appears to be dependent on maintaining old prices. As overall profitability is falling, John is considering phasing out these and concentrating on the Day and other new beds of more unique design. John is, however, worried that his present product costing system is flawed and he has called you in as a consultant to advise him. You found that each bed uses different types of wood and fitting. All production overhead is currently absorbed on a machine hour basis but you ascertain that BedTab's process involve four main activities as show in the table below. The information for a typical month is also as follows: Required: a) Calculate profits and profit margin, analysed by product, using the present (machine hour absorption) costing system. C. Explain any evidence you find to support your suspicious that the present product costing system is flawed. The addition of the Day to the original two models has added considerable complexity and diversity, especially as this new product is at lower volume. BedTab shows several symptoms of a flawed costing system: - The Day is selling "surprisingly" well in a competitive market and its high gross margin (20%) is difficult to explain. Perhaps the cost is too low and the price is too low, and hence sales increase. - Given Day's high gross margin, why are competitors not attacking it? - Sales appear to be moving from the higher volume old models to the lower volume new model, a dangerous change as economies of scale are lost. - Despite increased sales of the "higher margin" Day, overall profit is declining, hence reported Day costs and margins must be incorrect. The 20% profit margin may not be correct. 1) Your explanation for the differences in product profit margins observed. Day could be undercosted and underpriced under absorption while its cost under ABC is iigher. Solution Required: a) Calculate profits and profit margin, analysed by product, using the present (machine hour absorption) costing system. Current costing system (absorbing overheads on machine hours) b) Calculate profits and profit margin, analysed by product, using activity based costing system. Proposed Activity-based costing system: b) Calculate overhead rates for each activity pool, profits and profit margin, analysed by product, using activity based costing system. c) Explain any evidence you find to support your suspicious that the present product costing system is flawed. d. Compare the costing between the two systems, John Gardiner, a skilled carpenter, set up BedTab Limited to produce a self-assembly bed, the Stable. A few years later he introduced the Net, also a self-assembly bed, and for several years BedTab achieved steady growth in turnover and profits selling the two beds. Increased competition in the self-assembly bed forced John to design the Day, a more complex, adjustable bed but sill in assembly form. The Day has proved a success, its sales increasing as the demand of the Stable and Net declined. Moreover the Day continues to sell surprisingly well despite a recent price increase. Ongoing demand for the Stable and the Net appears to be dependent on maintaining old prices. As overall profitability is falling, John is considering phasing out these and concentrating on the Day and other new beds of more unique design. John is, however, worried that his present product costing system is flawed and he has called you in as a consultant to advise him. You found that each bed uses different types of wood and fitting. All production overhead is currently absorbed on a machine hour basis but you ascertain that BedTab's process involve four main activities as show in the table below. The information for a typical month is also as follows: Required: a) Calculate profits and profit margin, analysed by product, using the present (machine hour absorption) costing system. C. Explain any evidence you find to support your suspicious that the present product costing system is flawed. The addition of the Day to the original two models has added considerable complexity and diversity, especially as this new product is at lower volume. BedTab shows several symptoms of a flawed costing system: - The Day is selling "surprisingly" well in a competitive market and its high gross margin (20%) is difficult to explain. Perhaps the cost is too low and the price is too low, and hence sales increase. - Given Day's high gross margin, why are competitors not attacking it? - Sales appear to be moving from the higher volume old models to the lower volume new model, a dangerous change as economies of scale are lost. - Despite increased sales of the "higher margin" Day, overall profit is declining, hence reported Day costs and margins must be incorrect. The 20% profit margin may not be correct. 1) Your explanation for the differences in product profit margins observed. Day could be undercosted and underpriced under absorption while its cost under ABC is iigher