Suppose you have been asked to attend a meeting of top management of your company. When the meeting begins, you are asked to explain in general terms the main differences and similarities in traditional and ABC systems and why managers might prefer ABC costs for decision-making purposes. You have only Exhibits 4.6 and 4.7 as a guide, so you quickly display these side-by-side on a PowerPoint slide, and, after taking a deep breath, you begin to talk. What similarities and differences would you point out? What advantages do ABC costs have?

 Exhibits 4.6

Exhibit 4.7

Transcribed Image Text:

Panel A Process map of Lopez Plastics Company's traditional cost system Direct materials for pen casings €22,500 All indirect production costs €220,000 Cost allocation base [direct labour hours] Direct labour for pen casings €135,000 Direct materials for mobile phone casings €12,000 SALES +€360,000 *€220,000 X (4,500 + 5,000) = €198,000 t€220,000x (500 ÷ 5,000) = €22,000 All unallocated value chain SALES €80,000 costs €100,000 Direct labour for mobile phone casings €15,000 UNALLOCATED €100,000 Panel B Lopez Plastics Company statement of operating income traditional cost allocation system Statement of operating income [external reporting purpose Sales Cost of goods sold: Direct material Direct labour Indirect production Cost of goods sold Gross profit Corporate expenses (unallocated) Operating loss Gross profit margin Pen Mobile phone casings €440,000 €360,000 34,500 150,000 35,500 Contribution to corporate costs and profit [internal strategic decision-making purpose] 100,000 (€64,500) 8.07% 22,500 135,000 220,000 198,000* 22,000+ 404,500 355,500 49,000 casings €80,000 12,000 15,000 1.25% € 4,500 €31,000 38.75%