Question: Applewood Electronics, a division of Elgin
Applewood Electronics, a division of Elgin Corporation, manufactures two large-screen television models: the Monarch, which has been produced since 2012 and sells for $1,700, and the Regal, a new model introduced in early 2012, which sells for $2,200. Based on the following income statement for the year ended November 30, 2016, senior management at Elgin have decided to concentrate Applewood’s marketing resources on the Regal model and begin to phase out the Monarch model. 
Unit costs for the Monarch and Regal are as follows: 
A pplewood’s controller, Susan Benzo, is advocating the use of activity-based costing (ABC) and activity based management (ABM), and has gathered the following information about the company’s manufacturing overhead costs for the year ended November 30, 2016. 
After completing her analysis, Benzo showed the results to Filipe Figueira, the Applewood Division president. Figueira did not like what he saw. “If you show headquarters this analysis, they are going to ask us to phase out the Regal line, which we have just introduced. This whole costing thing has been a major problem for us. First Monarch was not profitable and now Regal. “Looking at the ABC analysis, I see two problems. We do many more activities than the ones you have listed. If you had included all activities, maybe your conclusions would have been different. Second, you used number of setups and number of inspections as allocation bases. The numbers would have been different had you used setup-hours and inspection-hours instead. I know that measurement problems precluded you from using these other cost allocation bases, but at least you ought to make some adjustments to our current numbers to compensate for these issues. I know you can do better. We can’t afford to phase out either product.†Benzo knew her numbers were fairly accurate. On a limited sample, she had calculated the profitability of Regal and Monarch using different allocation bases. The set of activities and activity rates she had chosen resulted in numbers that closely approximated those based on more detailed analyses. She was confident that headquarters, knowing that Regal was introduced only recently, would not ask Applewood to phase it out. She was also aware that a sizable portion of Figueira’s bonus was based on division sales. Phasing out either product would adversely affect the bonus. Still, she felt some pressure from Figueira to do something. Required: 1. Using activity-based costing (ABC), calculate the profitability of the Regal and Monarch models. 2. Explain briefly why these numbers differ from the profitability of the Regal and Monarch models calculated using Applewood’s existing costing system. 3. Comment on Figueira’s concerns about the accuracy and limitations of ABC. 4. How might Applewood find the ABC information helpful in managing its business? 5. What should Susan Benzo do?
Transcribed Image Text:
Applewood Electronics Income Statement For the Year Ended November 30, 2016 Monarch Regal Total Sales $30,600,000 $4,400,000 $35,000,000 Cost of goods sold 19,890,000 3,080,000 22,970,000 Gross margin 10,710,000 1,320,000 12,030,000 Selling and administrative expense 925,000 8,032,500 $ 2,677,500 8,957,500 $ 3,072,500 Operating income $ 395,000 Units sold 18,000 2,000 Operating income per unit sold $148.75 $197.50 Monarch Regal Direct materials $ 540.00 $1,089.00 Direct labour Monarch (2.5 hours × $18 per hr) 45.00 126.00 Regal (7.0 hours x $18 per hr) Machine costs* Monarch (8 hours x $25 per hr) 200.00 Regal (5 hours x $25 per hr) 125.00 Other manufacturing overhead** 320.00 200.00 Total $1,105.00 $1,540.00 "Machine costs include leasing of the machine, repairs, and maintenance. ** Other manufacturing overhead is allocated on the basis of machine-hours at a rate of $40 per machine-hour. Units of Cost Driver Activity Centre Total Activity Costs Monarch Regal Soldering (number of solder points) $1,872,400 1,296,000 214,000 Shipments (number of shipments) 1,480,000 1,500 500 Quality control (number of inspections) 1,749,600 54,000 18,000 Purchase orders (number of POs) 582,400 16,640 4,160 Machine power (machine-hours) Machine setups (number of setups) 61,600 144,000 10,000 414,000 360 100 Total manufacturing overhead $6,160,000
> The controller of a retailer has just had a $50,000 request to implement an ABC system quickly turned down. A senior vice-president involved in rejecting the request noted, “Given a choice, I will always prefer a $50,000 investment in improving things a
> Increasing the number of indirect cost pools is guaranteed to sizably increase the accuracy of product or service costs.” Do you agree? Why?
> Describe four ways that help indicate when ABC systems are likely to provide the most benefits.
> Department indirect cost rates are never activity cost rates.” Do you agree? Explain.
> What are the key reasons for product cost differences between traditional costing systems and ABC systems?
> A student association has hired a musical group for a graduation party. The cost will be a fixed amount of $4,800. Required: 1. Suppose 500 people attend the party. What will be the total cost of the musical group; the unit cost per person? 2. Suppose 4
> What is an activity-based approach to refining a cost assignment system?
> Describe three alternative ways to dispose of underallocated or overallocated indirect costs.
> Comment on the following statement: “In a normal costing system, the amounts in the Manufacturing Overhead Control account will always equal the amounts in the Manufacturing Overhead Allocated account.”
> How does actual costing differ from normal costing?
> What is the main concern about source documents used to prepare job-cost records?
> Describe the three major source documents used in job-costing systems.
> Jorge Michaels is the Winnipeg-based controller of SXSW Foods, a rapidly growing manufacturer and marketer of Mexican food products. Michaels is currently considering the purchase of a new cost management package for use by each of its six manufacturing
> Janet Segato is division controller and Tom Maloney is division manager of the Sports Shoe Company. Segato has line responsibility to Maloney, but she also has staff responsibility to the company controller. Maloney is under severe pressure to achieve bu
> Harvest Day Corporation is a publishing company that produces trade magazines. The company’s shareholders are awaiting the announcement of Harvest Day’s earnings for the fiscal year, which ends on December 31. Market analysts have predicted earnings to b
> Janet Taylor is the new division controller of the snack-foods division of Gourmet Foods. Gourmet Foods has reported a minimum 15% growth in annual earnings for each of the past five years. The snack-foods division has reported annual earnings growth of
> Ana Compo is getting ready to open a small restaurant. She is on a tight budget and must choose between the following long-distance phone plans: Plan A: Pay 10 cents per minute of long-distance calling. Plan B: Pay a fixed monthly fee of $16 for up to 30
> Stephen Bergstrom is the new corporate controller of a multinational company that has just overhauled its organizational structure. The company is now decentralized. Each division is under an operating vice-president who, within wide limits, has responsi
> Softmoc is a shoe retailing company. The majority of its sales are made at its own stores. These stores are often located in shopping malls or in the downtown shopping districts of cities. A small but increasing percentage of sales are made via its inter
> A series of independent situations in which a firm is about to make a strategic decision follow. a. Yello Phones is about to decide whether to launch production and sale of a cell phone with standard features. b. Soft Solutions is trying to decide wheth
> Julie Leung is the newly appointed president of Northern University. Northern University Hospital (NUH) is a major problem for her because it is running large deficits. While it is not-for-profit, the province will reduce funding if hospitals fail to mee
> Coast Finance helps prospective homeowners of substantial means to find low-cost financing and assists existing homeowners in refinancing their current loans at lower interest rates. Coast works only for customers with excellent borrowing capacity. Hence
> Electric Eels Company produces high-quality electric eels for Museums and Aquaria to sell in their gift shops. It accounts for the production of these eels with an ABC system. For 2015, Electric Eels expected to produce and sell 16,000 units, but actual
> You are a student preparing for a job interview with a large Canadian consumer products manufacturer. You are applying for a job in the finance department. This company is known for its rigorous case-based interview process. One of the students who succe
> Tropical Fruits Inc. processes tropical fruit into a fruit salad mix, which it sells to a food-service company. Tropical Fruits has in its budget the following standards for the direct materials inputs to produce a batch of 80 kilograms of tropical fruit
> MFD Manufacturing makes wooden furniture. One of their products is a wooden dresser. The exterior and some of the shelves are made of oak, a highquality wood, but the interior drawers are made of pine, a less expensive wood. The budgeted direct materials
> Memflash Inc. manufactures 4 gigabyte flash drives that are compatible with a popular portable storage device. Memflash sells flash drives directly to computer retail chains and to direct marketing organizations that resell flash drives under their house
> The Fremont, California, plant of NUMMI (New United Motor Manufacturing, Inc.), a joint venture of General Motors and Toyota, assembles two types of cars (Corollas and Geo Prisms). A separate assembly line is used for each type of car. Required: Classif
> Your new position as supervisor of product introduction, you have to decide on a pricing strategy for a talking doll specialty product with the following cost structure: Variable costs per unit ……â€&brv
> Styles Inc. manufactures a full line of well-known sunglasses frames and lenses. Styles uses a standard costing system to set attainable standards for direct materials, labour, and overhead costs. Styles reviews and revises standards annually, as necessa
> Aunt Molly’s Old Fashioned Cookies bakes cookies for a chain of retail stores. The company’s best-selling cookie is Chocolate Nut Supreme, which is marketed as a gourmet cookie and regularly sells for $9.60 per kilogra
> Shayna’s Smart Shawls Inc. is a small business that Shayna developed while in college. She began hand-knitting shawls for her dorm friends to wear while studying. As demand grew, she hired some workers and began to manage the operation. Shayna’s shawls r
> Morro Bay Surfboards is a California company that manufactures fibreglass surfboards. The standard cost of direct materials and direct manufacturing labour is $100 per board. This includes 20 kilograms of direct materials, at the budgeted price of $2 per
> On May 1, 2015, Terra Company began the manufacture of a new internet paging device known as Flare. The company installed a standard costing system to account for manufacturing costs. The standard costs for a unit of Flare are as follows: Direct materia
> Grant Electric Inc. manufactures lamps. It has set up the following standards per finished unit for direct materials and direct manufacturing labour: Direct materials: 10 kg at $4.50/kg ……………………………………….$45.00 Direct manufacturing labour: 0.5 hour at $30
> For its manufacturing facility in Montreal, Quebec, Metalmoulder has a long-term contract with Osaka Metals. Metalmoulder manufactures large-scale machining systems that are sold to other industrial companies. Each machining system has a s izable direct
> Stevie McQueen has run Lightning Car Detailing for the past 10 years. His static-budget and actual results for June 2015 are provided below. Stevie has one employee who has been with him for all 10 years that he has been in business. He has not been as l
> The city of Riverside hired its first city manager four years ago. She favoured a “management by objectives” philosophy and accordingly set up many profit responsibility centres, including a sanitation department, a utility department, and a repair shop.
> Slopes Inc. manufactures and sells snowboards. Slopes manufactures a single model, the Pipex. In the summer of 2015, Slopes’s accountant gathered the following data to prepare budgets for 2016. These units are standard in the lumber ind
> Home Entertainment Centre (HEC) operates a large store in Halifax. The store has both a DVD section and a music section (compact discs, MP3 players, etc.). HEC reports revenues for the DVD section separately from the music section. Required: Classify ea
> Duncan Company manufactures a variety of products in a variety of departments, and evaluates departments and departmental managers by comparing actual costs and outputs relative to their budgets. Departmental managers help create the budgets and usually
> Francois Chenier is the purchasing agent for Highlight Manufacturing Company. Marge Belvedere is head of the production planning and control department. Every six months, Belvedere gives Chenier a general purchasing program. Chenier gets specifications f
> Assume the following: Pet Transport (PT) does not make any sales on credit. PT sells only to the public, and accepts cash and credit cards. Of its sales, 90% are to customers using credit cards, for which PT gets the cash right away, less a 3% transactio
> Pet Transport Company makes two pet carriers, the Cat-allac and the Dog-eriffic. They are both made of plastic with metal doors, but the Cat-allac is smaller. Information for the two products for the month of April is given in the following tables: Inpu
> Korna Company manufactures a product, gizmo, that uses the following direct inputs: Korna has no direct materials inventory. All manufacturing overhead costs are variable costs. The manufacturing overhead cost comprises two activities: setup and operat
> On December 1, 2015, the Basma Wholesale Company is attempting to project cash receipts and disbursements through January 31, 2016. On January 31, 2016, a note will be payable in the amount of $120,000. This amount was borrowed in September to carry the
> The following information is for the Newport Stationery Store. Balance Sheet Information as of September 30 Current assets: Cash ……………â€&brvba
> Dinettes Inc. operates at capacity and makes glass-topped dining tables and wooden chairs that are typically sold as sets of four chairs with one table. However, some customers purchase replacement or extra chairs, and others buy some chairs or a table o
> Tofino Furniture is an elite desk manufacturer. It manufactures two products: ■Executive desks: 0.91 m × 1.5 m oak desks = 1.365 m 2 ■Director desks: 1.8 m × 1.2 m red oak desks = 2.16 m 2
> Strategy usually includes some formal processes. Required: 1. How can managers choose between different strategies? 2. How is strategy different from an operating decision?
> Ace Bicycle Company produces bicycles. This year’s expected production is 10,000 units. Currently, Ace makes the chains for its bicycles. Ace’s accountant reports the following costs for making the 10,000 bicycle chain
> Pumpkin Bags (PB) is a designer of high-quality backpacks and purses. Each design is made in small batches. Each spring, PB comes out with new designs for the backpack and for the purse. They use these designs for one year and then move on to the next tr
> Cartwright Ltd. manufactures two models of saddles, the Jordan and the Shenandoah. The Jordan is a more basic model and sells for $900. The Shenandoah is a professional-model saddle and sells for $1,500. At the beginning of the year, the following budget
> Pharmacare Inc. specializes in the distribution of pharmaceutical products. Pharmacare operates at capacity and has three main market segments: a. General supermarket chains b. Drugstore chains c. “Mom and Pop” single-
> Radhika’s Radiology Centre (RRC) performs X-rays, ultrasounds, CT scans, and MRIs. RRC has developed a reputation as a top radiology centre in the area. RRC has achieved this status because it constantly re-examines its processes and pr
> Family Supermarkets (FS) found that its ABC analysis (see the Pulling It All Together problem in this chapter) provided important insights. FS extends the analysis to cover three more product lines: baked goods, milk and fruit juice, and frozen products.
> Halifax Test Laboratories does heat testing (HT) and stress testing (ST) on materials. Under its current costing system, Halifax aggregates all operating costs of $1,440,000 into a single overhead cost pool. Halifax calculates a rate per test-hour of $18
> Wigan Associates has two classifications of professional staff—partners and managers. Hanley asks his assistant to examine the relative use of partners and managers on the recent Widnes Coal and St. Helen’s cases. The
> Hanley asks his assistant to collect details on those costs included in the $21,000 indirect-cost pool that can be traced to each individual case. After further analysis, Wigan is able to reclassify $14,000 of the $21,000 as direct costs: Hanley decide
> Wigan Associates is a recently formed law partnership. Ellery Hanley, the managing partner of Wigan Associates, has just finished a tense phone call with Martin Offiah, president of Widnes Coal. Offiah complained about the price Wigan charged for some le
> Financial accountants use estimates of financial value differently than either cost or management accountants. Required: 1. Identify two differences in use. 2. Identify a similarity among accountants.
> Naf Radiator Company uses a normal costing system with a single manufacturing overhead (MOH) cost pool and machine-hours (MH) as the cost allocation base. The following data are for 2016: Budgeted manufacturing overhead (MOH) …â
> J. Watson Kalor Ltd. uses a normal job-costing system with two direct cost categories, direct materials and direct labour, and one indirect cost pool. Manufacturing overhead is allocated based on direct labour costs. Any overallocated or underallocated o
> S. Sridhar, adapted Northley Industries is a manufacturer of sailboats. The following partial information for 2016 is available: Additional Information 1. Direct manufacturing labour wage rate was $16 per hour. 2. Manufacturing overhead (MOH) is alloca
> Nicole Limited is a company that produces machinery to customer order. Its job-costing system (using normal costing) has two direct cost categories (direct materials and direct manufacturing labour) and one indirect cost pool (manufacturing overhead, all
> Jack Halpern is the owner and CEO of Aerospace Comfort, a firm specializing in the manufacture of seats for air transport. He has just received a copy of a letter written to the Auditor General of the Canadian government. He believes it is from an ex-emp
> The following information relates to the activities of King Ltd. for the year 2016: The company uses normal costing and applies overhead on the basis of machine-hours (MH). The company had calculated its overhead rate to be $4.25 per MH on the basis of
> Corporation manufactures precision equipment made to order for the semiconductor industry. Glavine uses two manufacturing overhead cost pools—one for the overhead costs incurred in its highly automated Machining Department and another f
> Gaston Ltd. uses a normal job- costing system with two direct cost categories—direct materials and direct manufacturing labour—and one indirect cost category—manufacturing overhead. At the beginning of 2016, Gaston had $236,000 in work-in- process invent
> Keating has just completed a review of its job-costing system. This review included a detailed analysis of how past jobs used the firm’s resources and interviews with personnel about what factors drive the level of indirect costs. Manag
> Keating & Partners is a law firm specializing in labour relations and employee-related work. It employs 25 professionals (5 partners and 20 managers) who work directly with its clients. The average budgeted total compensation per professional for 2016 is
> Orillia Equipment sells riding lawn mowers. The average price for a lawn mower is $16,000. Orillia purchases these mowers from the manufacturers at an average cost of $12,200. Orillia’s monthly fixed costs are $28,000 in rent, $45,000 in salaries, $5,600
> Delcour Manufacturing budgeted $325,000 and incurred $337,000 of overhead costs in the past year. During the year, it allocated $302,000 to its production. An extract from the company’s financial records showed the following accountbalances: Allocated M
> Refer to requirement 3 of 3-40. In this problem assume the role of the owner of Walk Rite. Required: 1. Calculate the number of units sold where the operating income under (a) a fixed-salary plan and (b) a lower fixed-salary-and-commission plan (for sal
> The Walk Rite Shoe Company operates a chain of shoe stores. The stores sell ten different styles of inexpensive men’s shoes with identical unit costs and selling prices. A unit is defined as a pair of shoes. Each store has a store manager who is paid a f
> Prairie Ltd. currently manufactures a single product in its Saskatoon factory. Last year’s results (based on sales volume of 25,000 units) were Required: 1.Using last year’s data, calculate Prairie’
> R.A. Ro and Company, a manufacturer of quality handmade walnut bowls, has experienced a steady growth in sales for the past five years. However, increased competition has led Ro, the president, to believe that an aggressive marketing campaign will be nec
> Teddy Bear Daycare provides daycare for children Mondays through Fridays. Its monthly variable costs per child are Lunch and snacks……………………………………………………..$100 Educational supplies ……………………………………………………...75 Other supplies (paper products, toiletries, etc.
> Carumba Inc.’s 2015 budget includes the following items: Sales ……………………………………………………..80,000 units Production …………………………………………….80,000 units Direct materials used………………………………… $600,000 Direct labour ………………………………………………..400,000 Variable overhead ………………………
> Wildlife Escapes generates average revenue of $9,200 per person on its five-day package tours to wildlife parks in Kenya. The variable costs per person are Airfare ……………………………………………………….$3,500 Hotel accommodations. …………………………………1,200 Meals …………………………………
> Hoot Washington is the newly elected charismatic leader of the Western Party. He is the darling of the right-wing media. His “take no prisoners” attitude has left many an opponent on a talk show feeling run over by a Mack truck. Media Publishers is negot
> Domestic Engines Company produces the same power generators in two plants, a newly renovated, automated plant in Peona, and an older, less automated plant in Modine. The following data are available for the two plants: All unit fixed costs are calcula
> Diego Motors is a small car dealership. On average it sells a car for $26,000, which it purchases from the manufacturer for $22,000. Each month, Diego Motors pays $60,000 in rent and utilities and $70,000 for salespeople’s salaries. In addition to their
> Ahmed Diba is the controller of the Body Products Division of World Wide Drugs (WWD). It is located in Winnipeg, which is also the headquarters of WWD. Diba is helping develop a proposal for a new product to be called Vital Hair. This product is a cream
> Athabaska Ltd. produces a lens used for webcams. Summary data from its year 2014 statement of comprehensive income are as follows: Revenues …………………………………..$8,000,000 Variable costs ………………………………4,320,000 Fixed costs ……………………………………3,900,000 Operating inco
> David Hutchinson is an internationally known Canadian professor specializing in consumer marketing. In 2015, Hutchinson and United Kingdom Business School (UKBS) agreed to conduct a one-day seminar at UKBS for marketing executives. Each executive would p
> The Windsor Chamber of Commerce is planning its annual event. There are two possible plans: a. Hold the event at a local hotel. The fixed rental cost would be $2,700 and the charge for meals would be $110 per person. b. Hold the event at the University o
> The City of Vancouver makes an $850,000 lump-sum budget appropriation to run a safe injection site for a year. All the appropriation is to be spent. The variable costs average $16 per patient visit. Fixed costs are $500,000 per year. Required: 1. Comput
> Technology of the Past (TOP) produces old-fashioned simple corkscrews. Last year was not a good year for sales but TOP expects the market to pick up this year. Last year’s statement of comprehensive income showed Sales revenues ($4 per corkscrew) ………………
> Manitoba Production Corporation (MPC) specializes in the manufacture of one-litre plastic bottles. The plastic moulding machines are capable of producing 100 bottles per hour. The firm estimates that the variable cost of producing a plastic bottle is 25
> (CMA, adapted) Marston Corporation manufactures pharmaceutical products that are sold through a network of sales agents. The agents are paid a commission of 18% of sales. The statement of comprehensive income for the year ending December 31, 2014, under
> Bonavista Cribs manufactures baby cribs. It currently produces one model, the Surrey crib, and it is priced at $600. Variable manufacturing costs are $210 per unit and variable shipping costs are $60 per unit. Fixed costs are $2,574,000. In 2014, it sold
> Panther Productions is negotiating the next sequel to its Illinois Jones series. This negotiation is proving more difficult than for the original movie. There is a risk that the series may have peaked and the total box office receipts will drop. The budg
> CVP computations. Patel Manufacturing sold 200,000 units of its product for $30 per unit. Variable cost per unit is $25 and total fixed costs are $800,000. Required: 1.Calculate (a) contribution margin and (b) operating income. 2.Patel’s current manufac
> Panther Productions has just finished production of the most recent sequel in its Illinois Jones series. The film cost $22 million to produce. Most production personnel and actors were paid a fixed salary (included in the $22 million); however, the two m
> The Goldman Company retails two products, a standard and a deluxe version of a luggage carrier. The budgeted statement of comprehensive income is as follows: Required: 1.Compute the breakeven point in units, assuming that the planned revenue mix is ma
> (M. Rajan, adapted) Tocchet Company manufactures C B1, a citizens’ band radio that is sold mainly to truck drivers. The company’s plant in Camden has an annual capacity of 75,000 units. Tocchet currently sells 60,000 units at a selling price of $148. It
> Dawmart Corp., an international retail giant, is considering implementing a new business-to-business (B2B) information system for processing purchase orders. The current system costs Dawmart $1,000,000 per month and $40 per order. Dawmart has two options
> Lawnox, a manufacturer of lawn mowers, predicts that it will purchase 240,000 spark plugs next year. Lawnox estimates that 20,000 spark plugs will be required each month. A supplier quotes a price of $9 per spark plug. The supplier also offers a special
> Foxwood Company is a metal- and wood-cutting manufacturer selling products to the home construction market. Consider the following data for the year 2016: Required: 1. Prepare a statement of comprehensive income with a separate supporting schedule of c
