Question

The 4 questions to this problem are located at the bottom

Something’s wrong! Generator X Company produces two generators. The Excel has been
manufactured for more than 20 years and it sells for $900. The Power is a new model developed and marketed approximately two years ago. It sells for $1,140. Based on the information in the company’s income statement for 20x1, upper management wants to downscale and spend available marketing dollars on the Power while beginning to phase out the production of the Excel.

Generator X Company

Income Statement

For the year ended December 31, 20x1

	Power	Excel	Total
Sales	$ 4,560,000	$19,800,000	$24,360,000
Cost of goods sold	3,192,000	12,540,000	15,732,000
Gross Profit	$ 1,368,000	$ 7,260,000	$ 8,628,000
Selling and administrative expenses	978,000	5,830,000	6,808,000
Net Income	$ 390,000	$ 1,430,000	$ 1,820,000
Units Produced and sold	4,000	22,000
Net Income per unit sold	$97.50	$65.00

The standard unit costs of the Power and Excel generators are as follows:

	Power	Excel
Direct Materials	$ 584	$ 208
Direct Labor
Power(3.5 hr. X $12)	42
Excel(1.5 hr. X $12)		18
Machine usage
Power(4 hr. X $18)	72
Excel(8 hr. X $ 18)		144
Manufacturing overhead*	100	200
Total Standard cost	$ 798	$ 570

*Manufacturing overhead was applied on the basis of machine hours at a predetermined rate of $ 25 per hour.

Note: We have learned that direct costs include direct materials and direct labor. For our purposes in this problem, you should also assume that Machine usage is a direct cost.

Wait a minute!...before we do anything rash: Generator X’s controller (Western New England MSA graduate) wants to try one more thing. She instructs her accountants to gather relative information so that her department may try allocating manufacturing overhead using activity-based costing and activity-based management. The following info was gathered:

	Number of Events

Activity Center	Cost Driver	Traceable Cost	Power	Excel	Total
Soldering	# of solder joints	$ 942,000	385,000	1,185,000	1,570,000
Shipments	# of shipments	860,000	3,800	16,200	20,000
Quality control	# of inspections	1,240,000	21,300	56,200	77,500
Purchase Orders	# of orders	950,400	109,980	80,100	190,080
Machine Power	machine hours	57,600	16,000	176,000	192,000
machine setups	# of setups	750,000	14,000	16,000	30,000
Total traceable costs		$4,800,000

1) What is the problem to be solved?

2) Identify the relevant information needed to solve this problem.

3) What are the alternative methods commonly utilized to allocate manufacturing overhead costs to products? How are they different? Which method might be better in this situation?

4) Recalculate the cost of these products. Recalculate the the profit for each of these products. Calculations should be presented in the Income Statement format initially shown. Show calculations in total as well as on a per unit basis. Should Generator X Company stop production of the Excel Generator. Justify your decision.

Answer 1

ANS 1) In this problem we need to analyse the diffrence in allocation of cost using traditional and Activity Based Costing.

ANS 2) Relevant informations are Allocation of Cost Drivers , computation of Manufacturing overhead using Activity Based costing,Comparing income statements prepared using activity based costing and absorbtion costing (machine hr basis) etc.(see working notes)

ANS3) The Alternate method which can be adopted is making allocation of Manufacturing overheads using Activity Based Costing ,Since Cost drivers are identifiable allocation of costs as per drivers would give better estimates of costs.

ANS4)

from the above calculations it is clear that the product POWER consumes more manufacturing overheads in comparison to product EXCEL and also shows LOSS hence it is advisable to allocate resources to either to EXCEL or make efforts to enhance the sale of product POWER.