At the end of the day we look at the money in the bank. After each performance
Question:
Questions
1. Calculate the full cost per unit of ODD and TGD:
a. Using the existing costing method.
b. Using Greg's proposed ABC method (thus using the suggested "driver" information shown in Exhibit 4 of the case).
c. Using an "in-between" costing method that Greg and Lourdes intended to propose if they were unable to convince Richard and Mark that the ABC method should be adopted. The "in-between method" proposes to allocate overhead costs based on two drivers only: direct material cost and machine hours, as shown in Exhibit 5.
2. Why were (a) Lourdes and (b) Greg so interested in having the company change its cost system?
3. What are the effects, if any, of changing the company's costing method? Specifically, are the differences between these three methods significant in terms of
a. Their effect on individual product costs?
b. Their effect on total company profits (assuming that there are no changes in any operating decisions, such as regarding prices and production volumes)?
Where the differences are significant, explain why they exist. If there are no differences, or if the differences are not significant, explain why this is the case.
4. Do you think the cost system was a cause of the requests that Lourdes was receiving to discount ODDs back in 2001, when SMD was still a one-product, ODD-only company? Would it have made sense to start implementing ABC at that time?
5. What should SMD management do regarding its cost system? (To the extent that they exist, discuss the advantages and disadvantages of each alternative. Why did you recommend the alternative that you chose? Explain.)
Step by Step Answer:
Accounting Texts and Cases
ISBN: 978-1259097126
13th edition
Authors: Robert Anthony, David Hawkins, Kenneth Merchant