Designing an activity-based cost system Classic Brass Income Statement Year Ended December 31, 2013 Sales....... $3.200.000 Cost of goods sold: Direct materials. $ 975.000 Direct labour... 351,250 Manufacturing overhead". 1,000,000 2,326,250 Gross margin... 873.750 Selling and administrative expenses: Shipping expenses.. 65,000 Marketing expenses 300,000 General administrative expenses 510,000 875.000 Operating income $ (1.250) *The company's traditional costing system allocates manufacturing overhead to products using a plantwide overhead rate and machine-hours as the allocation base. Inventory levels did not change during the year. Background: The president of the company, John Towers, is concerned about the company's poor financial results He is concerned that the price for standard stanchions might be too high, but Tom Olafson, the marketing manager, believes competitors may be setting their prices very low, maybe even below cost, in order to increase market share. Mary Johns, the accounting manager, wonders if Classic Brass is incorrectly calculating the cost of standard stanchions and thinks ABC might help. The new ABC system would supplement, rather than replace, the existing cost accounting system, which would continue to be used for external financial reports. The new ABC system would be used to prepare special reports for management decisions such as bidding on new business. Custom Compass Housings 5540.000 Total $3.200.000 Product Margins-Traditional Cost System Standard Stanchions Sales.. $2,660,000 Cost of goods sold Direct materials $905.500 Direct labour. 263.750 Manufacturing overhead .. 875,000 2.044.250 Product margin Selling and administrative.. Operating income ***** $69.500 87.500 5.000 $ 975.000 352250 1000,000 282,000 1352.000 2.326,250 873.750 875.000 (1250) Designing an activity-based cost system Classic Brass Income Statement Year Ended December 31, 2013 Sales....... $3.200.000 Cost of goods sold: Direct materials. $ 975.000 Direct labour... 351,250 Manufacturing overhead". 1,000,000 2,326,250 Gross margin... 873.750 Selling and administrative expenses: Shipping expenses.. 65,000 Marketing expenses 300,000 General administrative expenses 510,000 875.000 Operating income $ (1.250) *The company's traditional costing system allocates manufacturing overhead to products using a plantwide overhead rate and machine-hours as the allocation base. Inventory levels did not change during the year. Background: The president of the company, John Towers, is concerned about the company's poor financial results He is concerned that the price for standard stanchions might be too high, but Tom Olafson, the marketing manager, believes competitors may be setting their prices very low, maybe even below cost, in order to increase market share. Mary Johns, the accounting manager, wonders if Classic Brass is incorrectly calculating the cost of standard stanchions and thinks ABC might help. The new ABC system would supplement, rather than replace, the existing cost accounting system, which would continue to be used for external financial reports. The new ABC system would be used to prepare special reports for management decisions such as bidding on new business. Custom Compass Housings 5540.000 Total $3.200.000 Product Margins-Traditional Cost System Standard Stanchions Sales.. $2,660,000 Cost of goods sold Direct materials $905.500 Direct labour. 263.750 Manufacturing overhead .. 875,000 2.044.250 Product margin Selling and administrative.. Operating income ***** $69.500 87.500 5.000 $ 975.000 352250 1000,000 282,000 1352.000 2.326,250 873.750 875.000 (1250)