Question

“See, I told you we made a good decision by introducing the Business and Deluxe chairs. Look at the profits generated by the two chairs that we are sellingat a premium.” These were the words of Linda Badger, CEO of Badger Chair Company (BCC). However, Steve Radcliffe, the VP of operations, did not echoher enthusiasm. “Linda, I must say my people on the shop floor are not too happy with the accounting report. They are still unable to believe that theBusiness and Deluxe chairs made money. According to them the production of these chairs created nothing but problems.”
Badger Chair Company makes four different types of chairs: Regular, Standard, Business, and Deluxe. The latter two types of chairs were introduced in2022. The production and sales of each type of chair were as follows during the last two years:
Regular
Standard
Business
Deluxe
2021
25,000
25,000
2022
20,000
20,000
5,000
5,000
Price (2022)
$
37.6
$
45.6
$
70.6
$
96.2
BCC uses a normal costing system wherein it traces direct material and direct labour costs to the individual products and allocates overhead costs byapplying predetermined departmental overhead rates to the actual volume of the allocation base pertaining to each department. For 2022, the followingoverhead costs were estimated in each of the two departments:
Estimated Overhead Cost and Activity Level
Machining department
$
580,000
(206,000 machine-hours)
Assembly department
$
625,600
(349,000 direct labour-hours)
Consider the following information regarding the
actual
consumption of resources by each of the four products in 2022:
Regular
Standard
Business
Deluxe
Machine-hours
91,000
82,000
18,000
15,000
Direct labour-hours
130,000
150,000
30,000
39,000
Prime costs (per unit)
$
17.6
$
25.4
$
37.4
$
42.4
Required:
1.
Compute the profitability of each type of chair (please show all the computational steps).
2.
In late 2022, Linsey Lindsay, the chief cost accountant, attended a week-long workshop entitled “Advanced Cost Management Methods” offered at a localuniversity. One particular concept she caught on to was activity-based costing, which she decided to implement. She found that the total overhead of$1,205,600 consisted of fi ve cost items and six different activities. Upon further analysis, she determined the proportions in which four of the fi ve cost itemswere consumed by the six activities (facility-level costs are not to be allocated to the activities).
IndirectLabourSalaries andBenefits($270,000)
EngineeringSalaries andBenefits($330,000)
Utilities
($212,000)
Depreciation($165,600)
AdministrativeCosts
($228,000)
Machining
20
%
10
%
35
%
40
%
N/A
Assembly
20
%
10
%
40
%
40
%
N/A
Machine setup
40
%
N/A
Engineering
45
%
N/A
Production planning
25
%
N/A
Maintenance
20
%
10
%
25
%
20
%
N/A
100
%
100
%
100
%
100
%
She further determined the following consumption of resources across the four products:
Regular
Standard
Business
Deluxe
Total
Number of batches
8
10
20
25
63
Setup time per batch
1.5
1.0
2.0
3.0
Machine-hours
91,000
82,000
18,000
15,000
206,000
Labour-hours
130,000
150,000
30,000
39,000
349,000
Maintenance calls
40
32
20
18
110
Maintenance-hours
236
210
198
176
820
Engineering-hours
166
156
112
136
570
2-a.
Prepare a table listing the different activities, costs associated with each activity, the appropriate allocation base and the allocation rate for each activity.
2-b.
Using the above activity rates, assign the costs to each of the four types of chairs and determine their profitability. For simplicity, assign the facility-levelcosts equally among the four products.

Answer 1

Answer:

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