The second activity is inventory selection and management. The estimated overhead related to this activity is...

  
 
 

Transcribed Image Text:

The second activity is inventory selection and management. The estimated overhead related to this activity is $91,700. The cost driver for this activity is the number of components per print item. An unframed print has one component, a steel-framed print has two components (the print and the frame), and a wood- framed print has three components (the print, the mat, and the frame). The total number of components is expected to be 131,000. Activity Inventory selection and management Cost Driver Number of components: Print (1) Print and frame (2) Print, mat, and frame (3) Estimated Overhead $91,700 Expected Use of Cost Driver Prints: 80,000 components Print and frame: 15,000 × 2 = 30,000 components Print, mat, and frame: 7,000 X 321,000 components Total 131,000 components The third activity is website optimization. The total overhead cost related to website optimization is expected to be $129,000. It was difficult to identify a cost driver that directly related website optimization to the products. In order to re- flect the fact that the majority of the time spent on this activity related to framed prints, vou first split the cost of website optimization between unframed prints Preview File Edit View Go Tools Window Help Fun Acct 2 Cases.pdf Page 8 of 30 ●●● Illustration CA 2-3 Information for activity 3 Activity Website optimization: Unframed The third activity is website optimization. The total overhead cost related to website optimization is expected to be $129,000. It was difficult to identify a cost driver that directly related website optimization to the products. In order to re- flect the fact that the majority of the time spent on this activity related to framed prints, you first split the cost of website optimization between unframed prints and framed prints. Based on your discussion with the IT professionals, you deter- mined that they spend roughly one-fifth of their time developing and maintain- ing the site for unframed prints, and the other four-fifths of their time on framed prints, even though the number of framed prints sold is substantially less than the number of unframed prints. As a consequence, you allocated $25,800 of the over- head costs related to website optimization to unframed prints and $103,200 to framed prints. You contemplated having three categories (unframed, steel-framed, and wood-framed with matting), but chose not to add this additional refinement. Framed Cost Driver Number of prints at capacity Number of prints at capacity Estimated Overhead $ 25,800 zoom $103,200 Q Search Expected Use of Cost Driver Unframed prints: 100,000 print capacity 2. Mon Mar 20 2:51 PM Framed and/or matted prints: 25,000 print capacity (16,000 steel; 9,000 wood) 2010 V Ⓒ Preview File Edit View Go Tools Window Help Fun Acct 2 Cases.pdf Page 9 of 30 ●●● Activity Framing and matting cost case 2 Cases for Management Decision-Making The final activity is framing and matting. The expected overhead costs related to framing and matting are $123,900. None of this overhead cost should be allo- cated to unframed prints. The costs related to framing and matting are relatively fixed because the costs relate to equipment and other costs that do not vary with sales volume. As a consequence, like website optimization, you chose to base the cost driver on levels at operating capacity, rather than at the expected sales level. The cost driver is the number of components. Steel-framed prints have two com- ponents (the print and frame), and wood-framed prints have three components (the print, mat, and frame). The total components at operating capacity would be steel frame 32,000 (or 16,000 X 2) and wood frame 27,000 (or 9,000 × 3,000). (equipment, insurance, rent, and supervisory labor) Cost Driver Number of components at capacity zoom Estimated Overhead $123,900 Q Search Greetings Expected Use of Cost Driver Print and frame: 16,000 X 2 = 32,000 components at capacity Print, mat, and frame: 9,000 X 3 = 27,000 components at capacity Total = 59,000 components Q. Mon Mar 20 2:51 PM To summarize, the overhead costs and cost drivers used for each product are expected to be: CA-9 Illustration CA 2-4 Information for activity 4 ● O V Ⓒ Preview File Edit View Go Tools Window Help Fun Acct 2 Cases.pdf Page 9 of 30 ●●● and supervisory labor) Activity 1. Picking prints 2. Inventory selection and management 3. Website To summarize, the overhead costs and cost drivers used for each product are expected to be: optimization Instructions Cost Driver Number of prints Number of Aa components 4. Framing and Number of matting Number of prints at capacity components at capacity Wood- Steel- Framed, Framed, No with Unframed Matting Matting Total 80,000 Capacity Total = 59,000 components 80,000 100,000 na 15,000 7,000 102,000 $30,600 30,000 21,000 131,000 100,000 9,000 25,000 16,000 32,000 27,000 Overhead Cost 59,000 91,700 25,800 103,200 zoom 123,900 $375,200 Q Search 2. Mon Mar 20 2:51 PM Illustration CA 2-5 Summary of overhead costs and cost drivers ● O V Ⓒ Preview File Edit View Go Tools Window Help Fun Acct 2 Cases.pdf Page 9 of 30 ●●● Q Q Û Answer the following questions. 1. Identify two reasons why an activity-based costing system may be appropriate for Wall Décor. CA-10 2. Compute the activity-based overhead rates for each of the four activities. 3. Compute the product cost for the following three items using ABC. (Review Case 1 for additional information that you will need to answer this question.) (a) Lance Armstrong unframed print (base cost of print $12). (b) John Elway print in steel frame, no mat (base cost of print $16). (c) Lambeau Field print in wood frame with mat (base cost of print $20). Greetings zoom case 2 Cases for Management Decision-Making Q Search 2. Mon Mar 20 2:51 PM 4. In Case 1 for Greetings, the overhead allocations using a traditional volume- based approach were $3.36 for Lance Armstrong, $4.48 for John Elway, and $5.60 for Lambeau Field. The total product costs from Case 1 were Lance Armstrong $17.36, John Elway $33.48, and Lambeau Field $48.10. The overhead allocation rate for unframed prints, such as the unframed Lance Armstrong print in question 3, decreased under ABC compared to the amount of overhead that was allocated under the tradi- tional approach in Case 1. Why is this the case? What are the potential implications for the company? 19 PA Ⓒ The second activity is inventory selection and management. The estimated overhead related to this activity is $91,700. The cost driver for this activity is the number of components per print item. An unframed print has one component, a steel-framed print has two components (the print and the frame), and a wood- framed print has three components (the print, the mat, and the frame). The total number of components is expected to be 131,000. Activity Inventory selection and management Cost Driver Number of components: Print (1) Print and frame (2) Print, mat, and frame (3) Estimated Overhead $91,700 Expected Use of Cost Driver Prints: 80,000 components Print and frame: 15,000 × 2 = 30,000 components Print, mat, and frame: 7,000 X 321,000 components Total 131,000 components The third activity is website optimization. The total overhead cost related to website optimization is expected to be $129,000. It was difficult to identify a cost driver that directly related website optimization to the products. In order to re- flect the fact that the majority of the time spent on this activity related to framed prints, vou first split the cost of website optimization between unframed prints Preview File Edit View Go Tools Window Help Fun Acct 2 Cases.pdf Page 8 of 30 ●●● Illustration CA 2-3 Information for activity 3 Activity Website optimization: Unframed The third activity is website optimization. The total overhead cost related to website optimization is expected to be $129,000. It was difficult to identify a cost driver that directly related website optimization to the products. In order to re- flect the fact that the majority of the time spent on this activity related to framed prints, you first split the cost of website optimization between unframed prints and framed prints. Based on your discussion with the IT professionals, you deter- mined that they spend roughly one-fifth of their time developing and maintain- ing the site for unframed prints, and the other four-fifths of their time on framed prints, even though the number of framed prints sold is substantially less than the number of unframed prints. As a consequence, you allocated $25,800 of the over- head costs related to website optimization to unframed prints and $103,200 to framed prints. You contemplated having three categories (unframed, steel-framed, and wood-framed with matting), but chose not to add this additional refinement. Framed Cost Driver Number of prints at capacity Number of prints at capacity Estimated Overhead $ 25,800 zoom $103,200 Q Search Expected Use of Cost Driver Unframed prints: 100,000 print capacity 2. Mon Mar 20 2:51 PM Framed and/or matted prints: 25,000 print capacity (16,000 steel; 9,000 wood) 2010 V Ⓒ Preview File Edit View Go Tools Window Help Fun Acct 2 Cases.pdf Page 9 of 30 ●●● Activity Framing and matting cost case 2 Cases for Management Decision-Making The final activity is framing and matting. The expected overhead costs related to framing and matting are $123,900. None of this overhead cost should be allo- cated to unframed prints. The costs related to framing and matting are relatively fixed because the costs relate to equipment and other costs that do not vary with sales volume. As a consequence, like website optimization, you chose to base the cost driver on levels at operating capacity, rather than at the expected sales level. The cost driver is the number of components. Steel-framed prints have two com- ponents (the print and frame), and wood-framed prints have three components (the print, mat, and frame). The total components at operating capacity would be steel frame 32,000 (or 16,000 X 2) and wood frame 27,000 (or 9,000 × 3,000). (equipment, insurance, rent, and supervisory labor) Cost Driver Number of components at capacity zoom Estimated Overhead $123,900 Q Search Greetings Expected Use of Cost Driver Print and frame: 16,000 X 2 = 32,000 components at capacity Print, mat, and frame: 9,000 X 3 = 27,000 components at capacity Total = 59,000 components Q. Mon Mar 20 2:51 PM To summarize, the overhead costs and cost drivers used for each product are expected to be: CA-9 Illustration CA 2-4 Information for activity 4 ● O V Ⓒ Preview File Edit View Go Tools Window Help Fun Acct 2 Cases.pdf Page 9 of 30 ●●● and supervisory labor) Activity 1. Picking prints 2. Inventory selection and management 3. Website To summarize, the overhead costs and cost drivers used for each product are expected to be: optimization Instructions Cost Driver Number of prints Number of Aa components 4. Framing and Number of matting Number of prints at capacity components at capacity Wood- Steel- Framed, Framed, No with Unframed Matting Matting Total 80,000 Capacity Total = 59,000 components 80,000 100,000 na 15,000 7,000 102,000 $30,600 30,000 21,000 131,000 100,000 9,000 25,000 16,000 32,000 27,000 Overhead Cost 59,000 91,700 25,800 103,200 zoom 123,900 $375,200 Q Search 2. Mon Mar 20 2:51 PM Illustration CA 2-5 Summary of overhead costs and cost drivers ● O V Ⓒ Preview File Edit View Go Tools Window Help Fun Acct 2 Cases.pdf Page 9 of 30 ●●● Q Q Û Answer the following questions. 1. Identify two reasons why an activity-based costing system may be appropriate for Wall Décor. CA-10 2. Compute the activity-based overhead rates for each of the four activities. 3. Compute the product cost for the following three items using ABC. (Review Case 1 for additional information that you will need to answer this question.) (a) Lance Armstrong unframed print (base cost of print $12). (b) John Elway print in steel frame, no mat (base cost of print $16). (c) Lambeau Field print in wood frame with mat (base cost of print $20). Greetings zoom case 2 Cases for Management Decision-Making Q Search 2. Mon Mar 20 2:51 PM 4. In Case 1 for Greetings, the overhead allocations using a traditional volume- based approach were $3.36 for Lance Armstrong, $4.48 for John Elway, and $5.60 for Lambeau Field. The total product costs from Case 1 were Lance Armstrong $17.36, John Elway $33.48, and Lambeau Field $48.10. The overhead allocation rate for unframed prints, such as the unframed Lance Armstrong print in question 3, decreased under ABC compared to the amount of overhead that was allocated under the tradi- tional approach in Case 1. Why is this the case? What are the potential implications for the company? 19 PA Ⓒ