Franklin Fireplace Inserts manufactures two premium models of fireplace inserts that provide more BTUs of heat per
Question:
Franklin Fireplace Inserts manufactures two premium models of fireplace inserts that provide more BTUs of heat per cord of wood than any other wood burning fireplace insert or stove. One model, the Heatilator, sells for $1,800, and the Heat Queen, a new model that sells for $1,200. Franklin’s marketing department suggested that the company should concentrate on the new Heat Queen model and begin to phase out the Heatilator model.
Franklin currently uses a traditional costing system. The following cost information has been used as a basis for pricing decisions over the past year.
Direct labor cost is $20 per hour, and the machine usage cost is $18 per hour. Manufacturing overhead costs were estimated at $4,800,000 and were allocated on the basis of machine hours.
Gwen Freely, the new company controller, suggested that an activity-based costing analysis first be performed to obtain a better picture of the true manufacturing cost. The following data were collected:
Number of Events during the year:
Machine setups 4,000 3,500 7,500
Selling, general, and administrative costs per unit sold are $175.00 for Heatilator and $125 for Heat Queen.
- Calculate the manufacturing cost per unit for Heatilator and Heat Queen under:
- A traditional costing system
- The ABC system
- Explain the differences in manufacturing cost per unit calculated in part (A).
- Which system would most likely do a better job of measuring costs for this product emphasis/keep or drop decision? Explain.
- Franklin’s controller points out that the ABC information could also be used to identify and eliminate non-value added activities. Explain how ABC and ABM can be used for this purpose.
Cost Management Measuring Monitoring and Motivating Performance
ISBN: 978-0470769423
2nd Canadian edition
Authors: Leslie G. Eldenburg, Susan Wolcott, Liang-Hsuan Chen, Gail Cook