Question

In: Accounting

CableTech Bell Corporation (CTB) operates in the telecommunications industry. CTB has two divisions: the Phone Division...

CableTech Bell Corporation (CTB) operates in the telecommunications industry. CTB has two divisions: the Phone Division and the Cable Service Division. The Phone Division manufactures telephones in two plants located in the Midwest: (1) a conventional phone plant and (2) cellular phone plant. The product lines run from relatively inexpensive touch-tone wall and desk phones to expensive, high quality cellular phones. CTB also operates a cable TV service in Ohio. The Cable Service Division offers three products: a basic package with 25 channels; an enhanced package which is the basic package plus 15 additional channels and two movie channels; and a premium package which is the basic package plus 25 additional channels and three movie channels.

The Cable Service Division reported the following sale and unit cost activity for the month of March:

CableTech Bell Corporation
Cable Service Division
For the Month Ended March, 20XX
Basic Enhanced Premium
Sales (units) 50,000 500,000 300,000
Price per unit $16 $30 $40
Unit costs:
  Directly traced $3 $5 $7
  Driver traced $2 $4 $6
  Allocated $10 $13 $15

The unit costs are divided as follows: 70 percent production and 30 percent marketing and customer service. Direct labor cost is the only cost driver used for tracing. Typically, the Cable Service Division uses only production costs to define unit costs. The preceding unit product cost information was provided at the request of the marketing manager, Dan Moniker, and was the result of a special study.

Bryce Youngers, the President of CTB, is reasonably satisfied with the March performance of the Cable Service Division. The March numbers were fairly typical of what has been happening over the past two years. The Phone Division, however, is another matter as its overall profit performance has been declining. Two years ago the Phone Division's income before income taxes was about 15 percent of sales. March's dismal performance was typical of the entire calendar year. This performance trend is expected to continue unless management takes actions to reverse it. During March, the Phone Division reported the following results:

CableTech Bell Corporation
Phone Division
For the Month of March, 20XX
Inventories:
  Materials, March 1 $23,000
  Materials, March 31 40,000
  Work in process, March 1 130,000
  Work in process, March 31 45,000
  Finished goods, March 1 480,000
  Finished goods, March 31 375,000
Costs:
  Direct labor $117,000
  Plant and equipment depreciation 50,000
  Material handling 85,000
  Inspections 60,000
  Scheduling 30,000
  Power 30,000
  Plant supervision 12,000
  Manufacturing engineering 21,000
  Sales commissions 120,000
  Salary, sales supervisor 10,000
  Supplies 17,000
  Warranty work 40,000
  Rework 30,000

During March, the Phone Division purchased materials totaling $312,000. There are no significant inventories of supplies (beginning or ending). Supplies are accounted for separately from materials. CTB's Phone Division had sales totaling $1,170,000 for the month of March.

After receiving the internal memo, Kim asked Jacob to use the same plant as a pilot for a preliminary ABC analysis. She instructed him to assign all overhead costs to the plant's two products (Regular and Deluxe phone-models), using only four activities. The four activities were:(1) rework, (2) moving materials, (3) inspecting products, and (4) a general catch-all manufacturing activity labeled "other activities". Based on the special study, Kim knew that material handling and inspecting involved significant cost. In addition, based on data from production reports, the rework activity involved significant cost. If the ABC and unit-based cost assignments did not differ by breaking out these three major activities, then ABC may not matter (currently direct labor cost is used to assign overhead to products).

Pursuant to Kim's request, Jacob produced the following cost and driver information:

Activity Expected Cost Driver Activity Capacity
Reworking $152,000    Rework hours 1,520   
Moving Materials 360,000    Number of moves 7,200   
Inspecting 288,000    Inspection hours 9,600   
Other Activities $800,000    Direct labor dollars $500,000   
Total Overhead Cost $1,600,000   

Expected activity demands:

Regular Model Deluxe Model
Units completed 40,000    16,000   
Direct materials $200,000    $160,000   
Direct labor dollars $350,000    $150,000   
Number of moves 2,880    4,320   
Inspection hours 2,400    7,200   
Rework hours 760    760   

Required:

1. Calculate the overhead cost per unit for each phone model using direct labor cost to assign all overhead costs to products (round overhead rate to nearest cent).
Regular Model: $  per unit
Deluxe Model: $  per unit
2. Calculate the overhead cost per unit for each phone model using the four activities and drivers identified by Kim (round activity rates and final answers to the nearest cent, use the rounded answers in subsequent requirements, if required.)
Regular Model: $  per unit
Deluxe Model: $  per unit
3. Calculate the conversion cost per unit using activity-based assignments (round activity rates and final answers to the nearest cent, use the rounded answers in subsequent requirements, if required):
Regular Model: $  per unit
Deluxe Model: $  per unit
4. Calculate the prime cost per unit (round prime cost to the nearest cent):
Regular Model: $  per unit
Deluxe Model: $  per unit
5. Calculate the unit manufacturing cost using direct labor dollars to assign overhead (round overhead rate to the nearest cent):
Regular Model: $  per unit
Deluxe Model: $  per unit
6. Calculate the unit manufacturing cost using activity-based assignments (round intermediate and final answers to the nearest cent):
Regular Model (round to the nearest cent): $  per unit
Deluxe Model (round to the nearest cent): $  per unit
Summary Questions:
1. Using the ABC assignments as the benchmark, the unit manufacturing cost for the Regular model is currently - Select your answer -understatedoverstatedItem 13 by $ .
2. If the unit product cost of the Regular model is - Select your answer -understatedoverstatedItem 15 then the selling price could be - Select your answer -increaseddecreasedItem 16 making the company - Select your answer -morelessItem 17 competitive.
3. If Kim wants to know the unit operating product cost, then the costs of the additional activities must also be assigned to the products (Select "Yes" if the activity should be assigned to the products, else please select "No" from the below dropdowns.)
Scheduling - Select your answer -YesNoItem 18
Power - Select your answer -YesNoItem 19
Engineering - Select your answer -YesNoItem 20
Warranty - Select your answer -YesNoItem 21
Sales commissions - Select your answer -YesNoItem 22
Sales supervision - Select your answer -YesNoItem 23
Plant supervision - Select your answer -YesNoItem 24

Solutions

Expert Solution

OH: Over Head

Answer 1:

Number of units produced in march are not given (in case it was provided we would first distribute labor cost among the 2 products), further distribution of labor cost among products is also not provided. therefore we can not proceed with the answer any further.

Answer 2:

we are given with expected activity demands for both products which would be multiplied by cost per unit of activity to distribute the OHs in among the 2 products. after distribution of ohs the total productwise oh would be divided by units completed (given in the question).

Ans 3:

rework cost is not considered as part of conversion cost are it is assumed that it is not applied on all the completed units (it would be irrational to assume that rework has been done on all completed units).

Ans: 4:

Prime cost = (Direct raw materials cost + Direct labor cost) divided by Number of finished units

Under unit-based costing method: Since number of units for finished good under this method are not given, we have assumed same as of ABC analysis.

As per ABC Analysis data

Ans: 6

Answer: If Kim wants to know the unit operating product cost, then the costs of the additional activities


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