Timesaver, Inc., produces deluxe and regular microwaves. Recently, Timesaver has been losing market share with its regular
Question:
Earlene Day has indicated that poor overhead costing assignments may be distorting managements view of each products cost and, therefore, the ability to set profitable selling prices. Earlene has identified the following overhead activities: machining, testing, and rework. The three activities, their costs, and practical capacities are as follows:
The consumption patterns of the two products are as follows:
Timesaver assigns overhead costs to the two products using a plant wide rate based on machine hours.
Required:
1. Calculate the unit overhead cost of the regular microwave product using machine hours to assign overhead costs. Now, repeat the calculation using ABC to assign overhead costs. Did improving the accuracy of cost assignments solve Timesavers competitive problem? What did it reveal?
2. Now, assume that in addition to improving the accuracy of cost assignments, Earlene observes that defective supplier components are the root cause of both the testing and rework activities. Suppose further that Timesaver has found a new supplier that provides higher-quality components such that testing and rework costs are reduced by 50 percent. Now, calculate the cost of each product (assuming that testing and rework time are also reduced by 50 percent) using ABC. The relative consumption patterns also remain the same. Comment on the difference between ABC andABM.
Step by Step Answer:
Cost Management Accounting and Control
ISBN: 978-0324559675
6th Edition
Authors: Don R. Hansen, Maryanne M. Mowen, Liming Guan