Manchester Technology, Inc. manufactures several different types of printed circ
ID: 2529781 • Letter: M
Question
Manchester Technology, Inc. manufactures several different types of printed circuit boards; however, two of the boards account for the majority of the company’s sales. The first of these boards, a television circuit board, has been a standard in the industry for several years. The market for this type of board is competitive and price-sensitive. Manchester plans to sell 79,000 of the TV boards in 20x1 at a price of $450 per unit. The second high-volume product, a personal computer circuit board, is a recent addition to Manchester’s product line. Because the PC board incorporates the latest technology, it can be sold at a premium price. The 20x1 plans include the sale of 54,000 PC boards at $785 per unit.
Manchester’s management group is meeting to discuss how to spend the sales and promotion dollars for 20x1. The sales manager believes that the market share for the TV board could be expanded by concentrating Manchester’s promotional efforts in this area. In response to this suggestion, the production manager said, “Why don’t you go after a bigger market for the PC board? The cost sheets that I get show that the contribution from a PC board is significantly larger than the contribution from a TV board. I know we get a premium price for the PC board. Selling it should help overall profitability.”
The cost-accounting system shows that the following costs apply to the PC and TV boards.
Variable manufacturing overhead is applied on the basis of direct-labor hours. For 20x1, variable overhead is budgeted at $2,450,000, and direct-labor hours are estimated at 322,875. The hourly rates for machine time and direct labor are $26 and $34, respectively. The company applies a material-handling charge at 10 percent of material cost. This material-handling charge is not included in variable manufacturing overhead. Total 20x1 expenditures for direct material are budgeted at $25,209,000.
Andrew Fulton, Manchester’s controller, believes that before the management group proceeds with the discussion about allocating sales and promotional dollars to individual products, it might be worthwhile to look at these products on the basis of the activities involved in their production. Fulton has prepared the following schedule to help the management group understand this concept.
“Using this information,” Fulton explained, “we can calculate an activity-based cost for each TV board and each PC board and then compare it to the standard cost we have been using. The only cost that remains the same for both cost methods is the cost of direct material. The cost drivers will replace the direct labor, machine time, and overhead costs in the old standard cost figures.”
Required:
1. Identify at least four general advantages associated with activity-based costing.
2. On the basis of Manchester’s unit cost data given in the problem, calculate the total amount that each of the two product lines will contribute toward covering fixed costs and profit in 20x1.
3. Using activity-based costing, calculate the total amount that each of the two product lines will contribute toward covering fixed costs and profit in 20x1.
PC Board TV Board Direct material $ 243 $ 153 Direct labor 3.5 hr. 1.5 hr. Machine time 1.5 hr. 1.5 hr.Explanation / Answer
Answers:-
Q-1 Advantages
Allows management to focus on value-added and non-value-added activities, so that non-value-added activities can be controlled or eliminated, thus streamlining production processes.
Highlights the relationship between activities and identifies opportunities to reduce costs (i.e., designing products with fewer parts in order to reduce the cost of the manufacturing process).
Provides management with a more thorough understanding of complex product costs and product profitability for improved resource management and pricing decisions.
Provides a more appropriate means of charging overhead costs to products.
Q-2
Unit Costing
Particulars
PC Board
TV Board
Total
Total Units
54000
79000
-
Selling Price
785
450
-
Less:- Variable Cost
Direct Material
-243
-153
-
Direct Labour Cost
-119
-51
-
Machine Cost
-39
-39
-
Material Handling Charges 10% of Material Cost
-24.3
-15.3
-
Total Variable Manufacturing Overhead
-425.3
-258.3
-
-
Contribution Per Unit
359.7
191.7
-
Total Amount of Contribution towards covering Fixed Cost
19423800
15144300
34568100
Less:- Fixed Cost
-
-
17754000
Net Profit
-
-
16814100
Q-3
Activity Based Costing
Budgeted Cost
Amount
Cost Driver
Budgeted Annual Activity for Cost Driver
Per Cost Driver
Procurement
940000
Number of parts
8024100
0.12
Production scheduling
510000
Number of boards
139650
3.65
Packaging and shipping
1020000
Number of boards
139650
7.30
Machine setup
948000
Number of setups
615300
1.54
Hazardous waste disposal
124000
Pounds of waste
50337
2.46
Quality control
1204000
Number of inspections
475650
2.53
General supplies
174000
Number of boards
139650
1.25
Machine insertion
3100000
Number of parts
5658000
0.55
Manual insertion
9400000
Number of parts
2256000
4.17
Wave-soldering
334000
Number of boards
139650
2.39
Per Unit Cost
On the Basis of
Above Calculated
Cost Driver
Budgeted Cost
PC Board
TV Board
Procurement
0.12
9.72
4.69
Production scheduling
3.65
3.65
3.65
Packaging and shipping
7.30
7.30
7.30
Machine setup
1.54
7.70
6.16
Hazardous waste disposal
2.46
1.97
1.48
Quality control
2.53
10.13
7.59
General supplies
1.25
1.25
1.25
Machine insertion
0.55
27.39
21.37
Manual insertion
4.17
137.50
4.17
Wave-soldering
2.39
2.39
2.39
Total Cost of Per Unit as per ABC
209.01
60.05
Particulars
PC Board
TV Board
Total
Total Units
54000.00
79000.00
-
Selling Price
785.00
450.00
-
Less:- Variable Cost
Direct Material
-243.00
-153.00
-
Direct Labour Cost
-119.00
-51.00
-
Machine Cost
-39.00
-39.00
-
Total Variable Manufacturing Overhead
-401.00
-243.00
-
Less:- ABC
-209.01
-60.05
-
Total Cost Per Unit
-610.01
-303.05
-
Contribution Per Unit
174.99
146.95
-
total contribuation
9449403.65
11609140.35
21058544.00
Less: Fixed Cost
-
-
4244444.00
Net Profit
-
-
16814100.00
Q-2
Unit Costing
Particulars
PC Board
TV Board
Total
Total Units
54000
79000
-
Selling Price
785
450
-
Less:- Variable Cost
Direct Material
-243
-153
-
Direct Labour Cost
-119
-51
-
Machine Cost
-39
-39
-
Material Handling Charges 10% of Material Cost
-24.3
-15.3
-
Total Variable Manufacturing Overhead
-425.3
-258.3
-
-
Contribution Per Unit
359.7
191.7
-
Total Amount of Contribution towards covering Fixed Cost
19423800
15144300
34568100
Less:- Fixed Cost
-
-
17754000
Net Profit
-
-
16814100
Q-3
Activity Based Costing
Budgeted Cost
Amount
Cost Driver
Budgeted Annual Activity for Cost Driver
Per Cost Driver
Procurement
940000
Number of parts
8024100
0.12
Production scheduling
510000
Number of boards
139650
3.65
Packaging and shipping
1020000
Number of boards
139650
7.30
Machine setup
948000
Number of setups
615300
1.54
Hazardous waste disposal
124000
Pounds of waste
50337
2.46
Quality control
1204000
Number of inspections
475650
2.53
General supplies
174000
Number of boards
139650
1.25
Machine insertion
3100000
Number of parts
5658000
0.55
Manual insertion
9400000
Number of parts
2256000
4.17
Wave-soldering
334000
Number of boards
139650
2.39
Per Unit Cost
On the Basis of
Above Calculated
Cost Driver
Budgeted Cost
PC Board
TV Board
Procurement
0.12
9.72
4.69
Production scheduling
3.65
3.65
3.65
Packaging and shipping
7.30
7.30
7.30
Machine setup
1.54
7.70
6.16
Hazardous waste disposal
2.46
1.97
1.48
Quality control
2.53
10.13
7.59
General supplies
1.25
1.25
1.25
Machine insertion
0.55
27.39
21.37
Manual insertion
4.17
137.50
4.17
Wave-soldering
2.39
2.39
2.39
Total Cost of Per Unit as per ABC
209.01
60.05
Particulars
PC Board
TV Board
Total
Total Units
54000.00
79000.00
-
Selling Price
785.00
450.00
-
Less:- Variable Cost
Direct Material
-243.00
-153.00
-
Direct Labour Cost
-119.00
-51.00
-
Machine Cost
-39.00
-39.00
-
Total Variable Manufacturing Overhead
-401.00
-243.00
-
Less:- ABC
-209.01
-60.05
-
Total Cost Per Unit
-610.01
-303.05
-
Contribution Per Unit
174.99
146.95
-
total contribuation
9449403.65
11609140.35
21058544.00
Less: Fixed Cost
-
-
4244444.00
Net Profit
-
-
16814100.00
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