Ultratech, Inc., manufactures several different types of printed circuit boards;
ID: 2772989 • Letter: U
Question
Ultratech, 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. Ultratech plans to sell 84,000 of the TV boards in 20x4 at a price of $500 per unit. The second high-volume product, a personal computer circuit board, is a recent addition to Ultratech’s product line. Because the PC board incorporates the latest technology, it can be sold at a premium price. The 20x4 plans include the sale of 59,000 PC boards at $845 per unit.
Ultratech’s management group is meeting to discuss how to spend the sales and promotion dollars for 20x4. The sales manager believes that the market share for the TV board could be expanded by concentrating Ultratech’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 the PC board is more than double the contribution from the 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.
PC Board
TV Board
Direct material
$
248
$
158
Direct labor
3.5
hr.
1.0
hr.
Machine time
1.0
hr.
1.0
hr.
Variable manufacturing overhead is applied on the basis of direct-labor hours. For 20x4, variable overhead is budgeted at $30,694,400, and direct-labor hours are estimated at 319,550. The hourly rates for machine time and direct labor are $36 and $44, 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 20x4 expenditures for direct material are budgeted at $27,904,000.
Andrew Fulton, Ultratech’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.”
Budgeted Cost
Cost Driver
Budgeted Annual
Activity for Cost
Driver
Procurement
$
990,000
Number of parts
10,193,700 parts
Production scheduling
535,000
Number of boards
157,300 boards
Packaging and shipping
1,070,000
Number of boards
157,300 boards
Total
$
2,595,000
Machine setup
$
968,000
Number of setups
851,400 setups
Hazardous waste disposal
134,000
Pounds of waste
54,692 pounds
Quality control
1,234,000
Number of inspections
379,500 inspections
General supplies
189,000
Number of boards
157,300 boards
Total
$
2,525,000
Machine insertion
$
3,350,000
Number of parts
6,793,000 parts
Manual insertion
9,900,000
Number of parts
2,819,000 parts
Wave-soldering
359,000
Number of boards
157,300 boards
Total
$
13,609,000
Required per unit
PC Board
TV Board
Parts:
93
45
Machine insertions
55
44
Manual insertions
38
1
Machine setups
6
5
Hazardous waste disposal
.80
lb.
.03
lb.
Inspections
3
2
1. Identify at least four general advantages associated with activity-based costing. (Select all that apply.)
Provides management with a more thorough understanding of complex product costs and product profitability for
improved resource management and pricing decisions.
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 a more appropriate means of charging overhead costs to products.
Requires less resources and is easier to implement than traditional costing systems.
Provides management with reports that are easier to interpret because only one manufacturing-overhead cost
pool is used per product.
2. On the basis of Ultratech’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 20x4. (Round your
intermediate calculations to 2 decimal places.)
$ $
PC Board TV Board
Total contribution margin
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 20x4. (Round your intermediate calculations to 2 decimal
places.)
PC Board TV Board
Total contribution margin
Ultratech, 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. Ultratech plans to sell 84,000 of the TV boards in 20x4 at a price of $500 per unit. The second high-volume product, a personal computer circuit board, is a recent addition to Ultratech’s product line. Because the PC board incorporates the latest technology, it can be sold at a premium price. The 20x4 plans include the sale of 59,000 PC boards at $845 per unit.
Ultratech’s management group is meeting to discuss how to spend the sales and promotion dollars for 20x4. The sales manager believes that the market share for the TV board could be expanded by concentrating Ultratech’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 the PC board is more than double the contribution from the 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.
PC Board
TV Board
Direct material
$
248
$
158
Direct labor
3.5
hr.
1.0
hr.
Machine time
1.0
hr.
1.0
hr.
Variable manufacturing overhead is applied on the basis of direct-labor hours. For 20x4, variable overhead is budgeted at $30,694,400, and direct-labor hours are estimated at 319,550. The hourly rates for machine time and direct labor are $36 and $44, 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 20x4 expenditures for direct material are budgeted at $27,904,000.
Andrew Fulton, Ultratech’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.”
Budgeted Cost
Cost Driver
Budgeted Annual
Activity for Cost
Driver
Procurement
$
990,000
Number of parts
10,193,700 parts
Production scheduling
535,000
Number of boards
157,300 boards
Packaging and shipping
1,070,000
Number of boards
157,300 boards
Total
$
2,595,000
Machine setup
$
968,000
Number of setups
851,400 setups
Hazardous waste disposal
134,000
Pounds of waste
54,692 pounds
Quality control
1,234,000
Number of inspections
379,500 inspections
General supplies
189,000
Number of boards
157,300 boards
Total
$
2,525,000
Machine insertion
$
3,350,000
Number of parts
6,793,000 parts
Manual insertion
9,900,000
Number of parts
2,819,000 parts
Wave-soldering
359,000
Number of boards
157,300 boards
Total
$
13,609,000
Required per unit
PC Board
TV Board
Parts:
93
45
Machine insertions
55
44
Manual insertions
38
1
Machine setups
6
5
Hazardous waste disposal
.80
lb.
.03
lb.
Inspections
3
2
1. Identify at least four general advantages associated with activity-based costing. (Select all that apply.)
Provides management with a more thorough understanding of complex product costs and product profitability for
improved resource management and pricing decisions.
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 a more appropriate means of charging overhead costs to products.
Requires less resources and is easier to implement than traditional costing systems.
Provides management with reports that are easier to interpret because only one manufacturing-overhead cost
pool is used per product.
2. On the basis of Ultratech’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 20x4. (Round your
intermediate calculations to 2 decimal places.)
$ $
PC Board TV Board
Total contribution margin
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 20x4. (Round your intermediate calculations to 2 decimal
places.)
PC Board TV Board
Total contribution margin
Ultratech, 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. Ultratech plans to sell 84,000 of the TV boards in 20x4 at a price of $500 per unit. The second high-volume product, a personal computer circuit board, is a recent addition to Ultratech’s product line. Because the PC board incorporates the latest technology, it can be sold at a premium price. The 20x4 plans include the sale of 59,000 PC boards at $845 per unit.
Explanation / Answer
The amount that contributes that covers fizxed costs and profit is called Contibution Margin. It is calculated as below:
Contibution Margin = Reveneu - Variable costs
2. On the basis of Ultratech’s unit cost data given in the problem
The allocation of variable overheads is done on the basis of direct labour hours.
Variable Overhead rate = Budgeted Variable overheads / Total direct labour hours
= $30,694,400 / 319,550 hours
= $96.06 per direct labour hour
Following tables shows the calculation of contribution margin for both production lines:
For PC Board
Per Unit
59000 Units
Revenue
$ 845.00
$ 49,855,000
Direct material
$ 248.00
$ 14,632,000
Material-handling charge
(10% of direct material)
$ 24.80
$ 1,463,200
Direct labor
(3.5 hours* $44)
$ 154.00
$ 9,086,000
Variable overhead
(3.5 hours*$96.06)
$ 336.21
$ 19,836,390
Machine time
(1 hour*$36)
$ 36.00
$ 2,124,000
Total cost
$ 799.01
$ 47,141,590
Unit contribution margin
(Revenue – Total cost)
$ 45.99
Total contribution margin
$ 2,713,410
For TV board
Per Unit
84000 Units
Revenue
$ 500.00
$ 42,000,000
Direct material
$ 158.00
$ 13,272,000
Material-handling charge
(10% of direct material)
$ 15.80
$ 1,327,200
Direct labor
(1 hours* $44)
$ 44.00
$ 3,696,000
Variable overhead
(1 hours*$96.06)
$ 96.06
$ 8,069,040
Machine time
(1 hour*$36)
$ 36.00
$ 3,024,000
Total cost
$ 349.86
$ 29,388,240
Unit contribution margin
$ 150.14
Total contribution margin
$ 12,611,760
3. Using activity-based costing
Under activity based costing, the variable costs are allocated to a product on the basis of activities performed on that product.
Firts we have to calculate the pool rate for each activity as following:
Activity
Budgeted cost
No. of activities
Pool rate
Cost driver
Procurement
$ 9,90,000
1,01,93,700
$ 0.10
per part
Production scheduling
$ 5,35,000
1,57,300
$ 3.40
per board
Packaging and shipping
$10,70,000
1,57,300
$ 6.80
per board
Machine setup
$ 9,68,000
8,51,400
$ 1.10
per setup
Hazardous waste disposal
$ 1,34,000
54,692
$ 2.50
per lb
Quality control
$12,34,000
3,79,500
$ 3.30
per inspection
General supplies
$ 1,89,000
1,57,300
$ 1.20
per board
Machine insertion
$33,50,000
67,93,000
$ 0.50
per part
Manual insertion
$99,00,000
28,19,000
$ 3.50
per part
Wave-soldering
$ 3,59,000
1,57,300
$ 2.30
per board
Now, the above pool rate shall be applied to both product lines:
PC Board
PC Board
Requirement per unit
Per Unit
Units
Revenue
845.00
$4,9,855,000
Direct material
248.00
$14,632,000
Procurement
93 parts
9.30
$ 548,700
Production scheduling
1 board
3.40
$ 200,600
Packaging and shipping
1 board
6.80
$ 401,200
Machine setup
6 machine setups
6.60
$ 389,400
Hazardous waste disposal
.80 lbs
2.00
$ 118,000
Quality control
3 inspections
9.90
$ 584,100
General supplies
1 board
1.20
$ 70,800
Machine insertion
55 machine insertions
27.50
$ 1,622,500
Manual insertion
38 manual insertions
133.00
$ 7,847,000
Wave-soldering
1 board
2.30
$ 135,700
Total cost
450.00
$26,550,000
Unit contribution margin
395.00
Total contribution margin
$23,305,000
TV Board
TV Board
Per Unit
Units
Revenue
$ 500.00
$42,000,000
Direct material
$ 158.00
$13,272,000
Procurement
45 parts
4.50
$ 378,000
Production scheduling
1 board
3.40
$ 285,600
Packaging and shipping
1 board
6.80
$ 571,200
Machine setup
5 machine setups
5.50
$ 462,000
Hazardous waste disposal
.03 lbs
0.08
$ 6,300
Quality control
2 inspections
6.60
$ 554,400
General supplies
1 board
1.20
$ 100,800
Machine insertion
44 machine insertions
22.00
$ 1,848,000
Manual insertion
1 manual insertions
3.50
$ 294,000
Wave-soldering
1 board
2.30
$ 193,200
Total cost
$ 213.88
$17,965,500
Unit contribution margin
286.13
Total contribution margin
$24,034,500
Per Unit
59000 Units
Revenue
$ 845.00
$ 49,855,000
Direct material
$ 248.00
$ 14,632,000
Material-handling charge
(10% of direct material)
$ 24.80
$ 1,463,200
Direct labor
(3.5 hours* $44)
$ 154.00
$ 9,086,000
Variable overhead
(3.5 hours*$96.06)
$ 336.21
$ 19,836,390
Machine time
(1 hour*$36)
$ 36.00
$ 2,124,000
Total cost
$ 799.01
$ 47,141,590
Unit contribution margin
(Revenue – Total cost)
$ 45.99
Total contribution margin
$ 2,713,410
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