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1.Venus Creations sells window treatments (shades, blinds, and awnings) to both commercial and residential customers. The following information relates to its budgeted operations for the current year. Revenues Direct materials costs Direct labor costs Overhead costs Operating income (loss) Commercial $357,500 $30,000 140,000 97,500 267,500 $90,000 Residential $160,500 $50,000 260,000 170,500 480,500 $(20,000) The controller, Peggy Kingman, is concerned about the residential product line. She cannot understand why this line is not more profitable given that the installations of window coverings are less complex for residential customers. In addition, the residential client base resides in close proximity to the company office, so travel costs are not as expensive on a per client visit for residential customers. As a result, she has decided to take a closer look at the overhead costs assigned to the two product lines to determine whether a more accurate product costing model can be developed. Here are the three activity cost pools and related information she developed Activity Cost Pools Scheduling and travel Setup time Supervision Estimated Overhead $97,500 110.500 60,000 Cost Drivers Hours of travel Number of setups Direct labor cost
Activity Cost Pools Scheduling and travel Setup time Supervision Estimated Overhead $97,500 110,500 60,000 Cost Drivers Hours of travel Number of setups Direct labor cost Estimated Use of Cost Drivers per Product Commercial Residential Scheduling and travel 800 700 Setup time 400 250
Compute the activity-based overhead rates for each of the three cost pools. (Round overhead rate for supervisi places, eg. 0.38.) Overhead Rates Scheduling and travel $ per dollar Setup time per setup Supervision per dollar.

2.

Madina Electrical Corporation manufactures electric motors for commercial use. The company produces three models called SM, DM and HDM. The company uses a job costing system with manufacturing overhead applied on the basis of direct labour hours. The system has been in place with little change for 30 years. Product costs and annual sales data are as follows:

For the past 13 years, the company’s pricing formula has been to set each product’s budgeted price at 110 per cent of its full product cost. Recently, however, the SM motor has come under increasing price pressure from offshore competitors. As a result, the price on the SM has been lowered to $210.

The company CEO recently asked the financial controller, ‘Why can’t we compete with these other companies? They’re selling motors just like our SM for $290. That’s only $2.50 more than our production cost. Are we really that inefficient?’

The financial controller responded by saying, ‘I think this is due to an outmoded product costing system. As you may remember, I raised a red flag about our system when I came on board last year. But the decision was to keep our current system in place. In my opinion, our product costing system is distorting our product costs. Let me run a few numbers to demonstrate what I mean’.

Getting the CEO’s go-ahead, the financial controller compiled the basic data needed to implement an Activity-Based Costing system. These data are displayed in the following tables. The percentages are the proportion of each activity driver consumed by each product line.

Activity Costs

Required

Read the above scenario and write a report to the managing director discussing the following key areas:

1. How Madina Electrical’s traditional product costing system distorts the product costs of the SM, DM and HDMs and prices. Note: You are required to calculate per unit cost and target price.
2. Discuss general problems associated with Madina Electrical Corporation traditional costing system and highlight any indicators that the current costing system is outdated and flawed.
3. Calculate per unit cost and target price for each product line using Activity-Based Costing (ABC) system. (Note: calculate the rate per activity driver to be used in the desired activity-based costing system. Round up to the nearest two decimal points)
4. Discuss costs and benefits of adopting Activity Based Costing for Madina Electrical Corporation.
5. Analyse and explain the differences in the product costs and target prices for each product line between the two alternative costing systems. Discuss likely reasons for the identified differences.