Jupiter Australasia Ltd owns Victory Mowers a manufacturer of gardening equipment which is sold domestically within Australia
Question:
Jupiter Australasia Ltd owns Victory Mowers a manufacturer of gardening equipment which is sold domestically within Australia and to an increasing export market. Victory Mowers manufactures two different models of lawnmowers: the cheaper ‘Lawn master’ and the environmentally-friendly and more expensive ‘Green Machine’. A dispute has arisen between senior management at Victory Mowers over the strategic direction of the company. The CEO of Victory, a former marketing executive, wishes to focus more strongly on developing the environmentally friendly ‘Green Machine’ as he believes it has a higher gross margin and is more profitable than the ‘Lawn master’. The ‘Green Machine’ is sold as a premium product through specialist mower dealers while the mass produced ‘Lawn master’ is sold as a basic model through the Bunnings Hardware chain. In contrast to her CEO the divisional management accountant has argued that the standard costing system is not suited to these products and may produce misleading results.
The Strategic Management Committee of Jupiter Australasia Ltd has asked for an analysis of the costing system to provide advice regarding the two models. Currently, Victory Mowers operates a standard costing system where identifiable direct costs are charged to each product and manufacturing overheads are allocated using direct labor hours (DLH) as the sole cost driver.
The following data is provided for the 2020 financial year:
2020 Sales and Cost estimates | Lawn master | Green Machine |
Forecast Sales (Units) | 200,000 | 25,000 |
Selling price per unit($) | $200 | $300 |
Prime Costs per unit | $100 | $150 |
DLH per Unit | 2.5 | 2.5 |
The activity costs budgeted for overhead for the 2020 financial year and related activity cost drivers were as follow:
OH Activity | OH Cost | Cost Driver | Amount of Cost Driver | |
Lawn master | Green Machine | |||
Set Ups | $493,750 | Number of Set ups | 25 | 50 |
Laser Cutter | $1,100,000 | Machine Hours | 30,000 | 10,000 |
Machining | $2,100,000 | Machine Hours | 50,000 | 15,000 |
Assembly | $1,250,000 | Labor Hours | 50,000 | 25,000 |
Packing | $1,800,000 | Number of Orders | 1000 | 500 |
Required:
(a) Using the current standard costing method of applying overhead using direct labor hours develop a spreadsheet to calculate for each model the expected:
i. Gross Profit per unit,
ii. Gross Profit margin ($GP/$Sales),
iii. Total Gross Profit per Model, and
iv. Total Firm Gross Profit.
(b) Using the overhead activity and cost data provided conduct the same analysis utilizing Activity Based Costing (ABC) techniques to allocate activity-based costs and again calculate for each model the expected:
i. Gross Profit per unit,
ii. Gross Profit margin ($GP/$Sales),
iii. Total Gross Profit per Model, and
iv. Total Firm Gross Profit.
(c) What advice would you give the Strategic Planning Committee and the management of Victory Mowers regarding the appropriate costing system and the comparable profitability of the two products? Provide an analysis explaining the reasons for the different outcomes achieved between using Standard Costing overhead allocation and ABC overhead allocation.
Statistics Data Analysis and Decision Modeling
ISBN: 978-0132744287
5th edition
Authors: James R. Evans