Fashion House, a manufacturer of high-fashion clothing for women, is located in South London. Its product line
Question:
Fashion House, a manufacturer of high-fashion clothing for women, is located in South London. Its product line consists of trousers (45 percent), skirts (35 percent) , dresses (15 percent), and other (5 percent). Fashion House has been using a volume-based rate to assign overhead to each product; the rate it uses is £2.25 per unit produced. The results for the trousers line, using the volume-based approach are as follows:
Number of units produced .......... 10,000
Price (all figures in £) ............ 20.525
Total revenue ................205,250
Direct materials ............... 33,750
Direct labor ................112,500
Overhead (volume-based) ........... 22,500
Total product cost ..............168,750
Nonmanufacturing expenses .......... 31,500
Total cost ...................200,250
Profit margin for trousers ............ 5,000
Recently, it has conducted a further analysis of the trousers line of product, using ABC. In the study, eight activities were identified, and direct labor was assigned to the activities. The total conversion cost (labor and overhead) for the eight activities, after allocation to the trousers line, is as follows:
Pattern cutting ......... £ 22,000
Grading ............. 19,000
Lay planning ........... 18,500
Sewing ............ 21,000
Finishing ............ 14,300
Inspection ............ 6,500
Boxing up ............ 3,500
Storage ............. 7,000
Required
Determine the profit margin for trousers using ABC, and comment on the difference in comparison to the volume-based calculations. Is Fashion House more likely to use ABC as a U.K. company than a similar company in France or the U.S. (refer to real world focus boxes in the chapter)?
Step by Step Answer:
Cost management a strategic approach
ISBN: 978-0073526942
5th edition
Authors: Edward J. Blocher, David E. Stout, Gary Cokins