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For the income statement associated with the Phone Division, include a supporting cost of goods manufactured statement.

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CableTech Bel Corporation (CTB) operates in the telecommunications industry. CTB has two divisions: the Phune Division and the Cable Service Division. The Phone Division manufactures telephones in several plants located in the Midwest. The product lines run from relatively inexpensive touch-tore wall and desk phones to expensive, high-quality cellular phones. CTB also operates a cable TV service in Ohio. The Cable Service Division offers three products: a basic package with 25 channels; an enhanced package, which is the basic package plus 35 additional channels and two movie channels, and a premium package, which is the basic package plus 55 additional channels and six movie channels. The Cable Service Division reported the following activity for the month of March: Basic Enhanced Premium Sales (units) 50,000 500,000 300,000 $90 Price per unit $32 $60 Unit costs: 55 $18 Directly traced Driver traced 54 $8 $12 Allocated $20 $26 $30 The unit costs are divided as follows: 70 percent production and 30 percent marketing and customer service. Direct labor cost is the only driver used for tracing. Typically, the division uses only production costs to define unit costs. The preceding unit product cast information was provided at the request of the marketing manager and was the result of a special study. Bryce Youngers, the president of CTB, is reasonably satisfied with the performance at the Cable Service Division. March's performance is fairty typical of what has been happening over the past two years. The Phone Division, however, is another matter its overall profit performance has been declining. Two years ago, income before income taxes had been about 25 percent of sales. March's dismal performance was also typical for what has been happening this year and is expected to continuc-unless some action by management is taken to reverse the trend. During March, the Phone Division reported the following results: Inventories: Materials, March 1 $23,000 Materials, March 31 Work in process, March 1 Work in process, March 31 40,000 130,000 45,000 480,000 375,000 Finished goods, March 1 Finished goods, March 31 Costs: Direct labor $117,000 50,000 Plant und equipment depreciation Materials handling 85,000 Inspections 60,000 Scheduling 30,000 30,000 Power Plant supervision 12,000 Manufacturing engineering 21,000 Manufacturing engineering 21,000 Sales cummissions 120,000 Salary, sales supervisor 10,000 Supplies 17,000 40,000 Warranty work Rework 30,000 During March, the Phone Division purchased materials totaling S312,000. There are no significant inventories of supplies (beginning or ending). Supplies are accounted for separately from materials. CTE's Phone Division had sales totaling $1,170,000 for March. Based on March's results, Eryce dedided to meet with three of the Phone Division's managers: Kim Breashears, divisional manager; Jacob Carder, divisional controller, and Larry Hartley, sales manager. A transcript of their recorded conversation is given next Bryce: "March's profit performance is down once again, and I think we need to see if we can identify the problem and correct it before it's too late. Kim, what's your assessment of the situation?" Kim: "Foreign competition is eating us alive-selling phones at a lower price and high quality. It we could lower cur prices by 10 ta 15 percent, I think that we'd regain most of our last market share. But we also need to make sure that the quality of our products meets that of our competitors. We are spending a lot of money each month on inspection, rewark, and warranties. I'd like to see these costs cut by at least 50 percent. If we could do that by improving quality, then customers would be more satisfied with our products, and we would not only regain our market share but increase it." Larry: 'They're right. If we could lower our prices by 10 to 15 percent, I think that we'd regain most of our lost market share. But we also need to make sure that the quality of our products meets that of our competitors. As you know, we are spending a lot of money each month on rewark and warranties. That warries me. Td like to see that warranty cost cut by 70 to 80 percent. If we could do that, then customers would be more satisfied with our products, and I bet that we would not only regain our market share but increase it Jacob: Lowering prices without lowering per-unit costs will not help us increase our profitability. I think we need to improve our cost accounting system. I am not confident that we really know how much each of our product lines is casting us. It may be that we are overpricing some of our units because we are overcosting them. We may be underpricing other units." Larry: 'This sounds promising-especially if the overcasting is for some of our high-volume lines. A price decrease for these products would make the biggest difference and if we know they were over-casted, then we could affer immediate price raductions." Bryce: "lacob, I need more explanation. We heve been using the same cost accounting system for the last 10 years. Why would it be a problem?" Jacob: "I think that our manufacturing erwironment has charged. Over the years, we have added a lot of different product lines. Some of these products make very different demands on our manufacturing overhead resources. We trace-or attempt to trace-overhead costs to the different products using direct labar cost, a unit-based cast driver. We may be doing mare allocation than trading. If so, then we probably don't have a very good idea of our actual product casts. Also, as you know, with the way computer technology has changed over time, it is easier and cheaper to collect and use detailed information-Information that will allow us to assign costs more accurately." Bryce: 'This may be something we should explore. lacob, what do you suggest? Jacob: "If we want more accurate product costs and we really want to get in the cost reduction business, then we need to understand how costs behave. In particular, we need to understand activity cost behavior. Knowing what activities we perform, why we perform them, and how well we perform then will help us identify areas for improvement. We also need to know how the different products consume activity resources. What this boils down to is the need to use an activity-based management systern. But before we jump into this, we need some idea of whether non- unit-based drivers add anything. Activity-based management is not an inexpensive undertaking. 50 I suggest that we do a preliminary study to see if direct labor cost is adequate trading. If not, then maybe some non-unit-drivers might be needed. In fact, if you would like, I can gather some data that will provide some evidence on the usefulness of the activity based approach. Bryce: "What do you think, Kim? It's your division." Kim: "What lacob has said sounds promising, I think he should pursue it and do so quickly. I also think that we need to look at improving our quality. It sounds like we have a problem there. If quality could be improved, then our costs will drop. I'll talk to our quality people. Jacob, in the meantime, find out for us ir moving to an activity-based system is the way to go. How much time do you need?" Jacob: "I have already been gathering dete. I could probebly have a report within two weeks." Jacob: "I have already been gathering data. I could probably have a report within two weeks." MEMO TO: Kim Breashears FROM: Jacob Carder SUBJECT: Preliminary Analysis Based on my initial analysis, I am confident that an ABC system will offer significant improvement. For one of our conventional phone plants, I regressed total monthly overhead cost on monthly direct labor cost using the following 15 months of data: Overhead Direct Labor Cost $360,000 $110,000 300,000 100,000 350,000 90,000 400,000 100,000 320,000 90,000 380,000 100,000 300,000 90,000 280,000 90,000 340,000 95,000 410,000 115,000 375,000 100,000 360,000 85,000 340,000 85,000 330,000 90,000 300,000 80,000 The results were revealing. Although direct labor cost appears to be a driver of overhead cost, it really doesn't explain a lot of the variation. I then searched for other drivers-particularly non-unit driversthat might offer more insight into overhead cost behavior. Every time a batch is produced, material movement occurs, regardless of the size of the batch. The number of moves seemed like a more logical driver. I was able to gather only 10 months of data for this. (Our information system doesn't provide the number of moves, so I had to build the data set by interviewing production personnel.) This information is provided next: Materials-Handling Cost Number of Moves $80,000 1,500 60,000 1,000 1,250 70,000 72,000 65,000 1,300 1,100 85,000 1,700 67,000 1,200 73,500 1,350 83,000 1,400 94,000 1,700 The regression results were impressive. There is no question in my mind that the number of moves is a good driver of materials-handling costs. Using the number of moves to assign materials-handling costs to products would likely be better than the cost assignment using direct labor cost. Furthermore, since small batches use the same number of moves as large batches, we have some evidence that we may be overcosting our high-volume products. Kim, you expressed the desire of reducing the costs of Inspection, reworking, and warranties. In addition to the pilot study for one piant, 1 ako collected information about these three activities for the division. For the inspection activity, we have 15 inspectors who are paid an average of $1,000 per month. Each inspector offers a practical inspection capacity of 2,000 hours per year. However, it appears that inspectors actually work only about 60 percent of those hours. Rework cost is simply the cost of replacing some faulty cumparents and the associated direct labor. The rework cost per unit is predictable and constant per unit regardless at the product model. Warranty cost, on the other hand, involves the salaries of two technicians, with the remaining cost, the cost of replacement components, which is relatively canstant per unit repaired. The technicians are paid $5,000 per month and provide 2.000 hours of service per year. Warranty service usually requires 3,600 technician hours per year. After receiving the memo, Kim was intrigued, both by the activity-based costing pilot study and by the potential savings for the division by improving quality. She then asked Jacob to use the same phare plant as a plat for a preliminary ABC analysis. She instructed him to assign all overhead costs to the plant's two products (Regular and Deluxe models), using only four activities. The four activities were rework, moving materials, inspecting products, and a general catch-all activity labeled "other manufacturing activities." From the special study el reachy performed, she knew that materials handling and inspecting involved significant cost; fram production reports, she also know that the rewark activity involved significant cost. If the ABC and unit-based cost assignments did not differ by breaking out these three major activities, then ABC may not matter. Pursuant to the request, Jacob precuced the following cost and driver information: Activity Expected Cost Driver Activity Capacity Other activities $2,000,000 Direct labor dollars $1,250,000 900,000 Number of moves 18,000 Moving materials Inspecting 720,000 Inspection hours 24,000 Reworking 340,000 Rework hours 3,800 Total overhead coat $4,000,000 Expected activity demands: Expected activity demands: Regular Model Deluxe Model Units completed 40,000 100,000 $475,000 Direct labor colars $375,000 Number of moves 7,200 10,000 Inspection hours 6,000 18,000 1.900 Rework hours 1,500 Required: 1. Answer the following regarding the product casting system of the Cable Service Division: A. Complete the following table with the appropriate product costs for the Cable Service Division: Round the answers to two decimal places. Basic Enhanced Premium Product cost for pricing 30 527 $ 78 Product cost for cost of services sold 217 36.4 54.6 The product cost for the pricing decision Includes all production, marketing, and customer service costs. There may be, and very likely is very little RSD function in the Cable Service Division. Thus, this first unit cost could be used for other managerial objectives, , , such as product mix decisions and strategic and tactical profitability analysis. The second castindudes only production cost complying with external financial reporting guidelines is the primary managerial objective of this method. b. Allucation relies on assumed linkages or convenience to assign costs. 6. Direct tracing relies on: exclusive physically observable causal relationships to assign costs. d. Driver tracing reles on causal factors to assign costs. e. Based on how costs are assigned, do you think that the Cable Service Division is using a functional-based or an activity-based costing system? functional-based - 2. Prepare an income statement for the Cable Service Division for March. Cable Service Division Income Statement For the Month of March Sales revenue 58,600,000 35,630,000 Cost of services sold Gross margin 22,970.000 Less: Operating expenses 15,270,000 Income before income taxes $ 7,700,000 Feedback Check My Work 2. Prepare in good form subtracting operating expenses from gross margin to equal income before income taxes for the Income Statement for the Cable Service Division. For the Phone Division, remember to consider b of goods sold. Subtract selling expenses from gross margin to calculate income before income taxes. In calculating the Statement of Cost of Goods Manufactured for the Phone Division, remember to consider beginning ending work in process inventory. Be sure to include all overhead costs. Prepare an income statement for the Phone Division for March. Phone Division Income Statement For the Month of March Sales $ 1,170,000 480,000 832,010 | Cost of goods sold: Beginning finished goods inventory Add: Cost of goods manufactured Goods available for sale Less: Ending finished goods inventory Gross margin Less: Selling expenses : Income before income taxes 375.000 937,000 170,000 Feedback Feedback Check My Work Partially correct For the income statement associated with the Phone Division, include a supporting cost of goods manufactured statement. Phone Division Statement of Cost of Goods Manufactured For the Month of March Direct materials: : Beginning inventory 23,000 Add: Purchases : 312,000 Materials available 335.000 Less: Ending inventory 40,000 Direct materials used 295,000 Direct labor 117,000 Overhead: Plant and equipment depreciation Materials handling Inspections Scheduling Power Plant supervision Manufacturing engineering Supplies . Rework 335,000 $ 747,000 Total manufacturing costs added: Add: Beginning work in process Less: Ending work in process 130,000 | 375,000 X Cost of goods manufactured blank $ 832,000