Question

The Tele-Vision Corporation produces high end LCD flat screen HD-TVs. They make 3 different models. Under their old cost system, Tele-Vision allocated overhead costs based on direct labor dollars. Recently, the firm adopted an ABC cost system. The move to ABC was due to a price war in the market for 30” LCD in order to attract buyers for the World Cup. The market price for a comparable 30” LCD TV was $400. The 30” LCD unit of Tele-Vision could not figure out how their competitors were able to offer such low prices. The following data relates to one of their products, the 30” LCD:

30” LCD

Annual Production     10,000 units

Direct Materials        $150 per unit

Direct Labor              $60   per unit

Firm wide Manufacturing Overhead cost pools:

Cost Pool	Cost	Cost Driver
Material Ordering	$800,000	Number of Purchase orders
Material Inspection	$300,000	Number of receiving reports
Machine Setup	$6,600,000	Number of Setups
Quality Control	$900,000	Number of output Units (1 inspection for every 40 units)
Rent & other fixed costs	$10,000,000	Direct Labor Costs
Total overhead	$18,600,000

Annual Activity

Cost Pool	All Products	30” LCD
Material Ordering	400,000 Purchase Orders	80,000
Material Inspection	2,000 receiving reports	500
Machine Setup	6,000 setups	150
Quality Control	60,000 output Units	20,000
Rent & other fixed costs	$4,000,000 DL cost	$600,000

Required:

1.Calculate the unit cost per 30” LCD TV under the old cost system.

2.Calculate the unit cost per 30” LCD TV under the new ABC costing system. Can Tele-Vision offer the market price?

3.Would the results change if we used the number of inspections as the cost driver for quality control instead of number of unit?

Answer 1

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The Tele-Vision Corporation
Answer a
Calculation of Predetermined OH Rate	Amount $	Note
Total Labor cost	4,000,000.00	A
Total overhead	18,600,000.00	B
Predetermined OH Rate	4.65	C=B/A
Answer 1
Product cost- Current Costing System	Amount $	Note
Direct Materials	150.00
Direct Labor	60.00	D
Allocated OH per unit	279.00	E=C*D
Product cost	489.00

Calculation of ABC rates for overhead		F	G	H=F/G
Activity cost pool	Activity Measure	Cost	Activity	ABC rates
Material Ordering	Number of Purchase orders	800,000.00	400,000.00	2.00
Material Inspection	Number of receiving reports	300,000.00	2,200.00	136.36
Machine Set up	Number of Setups	6,600,000.00	6,000.00	1,100.00
Quality Control	Number of output Units (1 inspection for every 40 units)	900,000.00	1,500.00	600.00
Rent & Other fixed costs	Direct Labor Costs	10,000,000.00	4,000,000.00	2.50
Total Cost assigned		18,600,000.00

		See H	I	J=H*I
Allocation table			30' LCD
Activity cost pool	Activity Measure	ABC Rates	Activity used	Cost assigned
Material Ordering	Number of Purchase orders	2.00	80,000.00	160,000.00
Material Inspection	Number of receiving reports	136.36	500.00	68,181.82
Machine Set up	Number of Setups	1,100.00	150.00	165,000.00
Quality Control	Number of output Units (1 inspection for every 40 units)	600.00	500.00	300,000.00
Rent & Other fixed costs	Direct Labor Costs	2.50	600,000.00	1,500,000.00
Total Cost assigned				2,193,181.82	K
Units produced				10,000.00	L
Costs per unit				219.32	M=K/L

Answer 2
Product cost- ABC System	Amount $	Note
Direct Materials	150.00
Direct Labor	60.00
Allocated OH per unit	219.32	See M
Product cost	429.32

Calculation of ABC rates for overhead		F	G	H=F/G
Activity cost pool	Activity Measure	Cost	Activity	ABC rates
Material Ordering	Number of Purchase orders	800,000.00	400,000.00	2.00
Material Inspection	Number of receiving reports	300,000.00	2,200.00	136.36
Machine Set up	Number of Setups	6,600,000.00	6,000.00	1,100.00
Quality Control	Number of output Units (1 inspection for every 40 units)	900,000.00	2,200.00	409.09
Rent & Other fixed costs	Direct Labor Costs	10,000,000.00	4,000,000.00	2.50
Total Cost assigned		18,600,000.00

		See H	I	J=H*I
Allocation table			30' LCD
Activity cost pool	Activity Measure	ABC Rates	Activity used	Cost assigned
Material Ordering	Number of Purchase orders	2.00	80,000.00	160,000.00
Material Inspection	Number of receiving reports	136.36	500.00	68,181.82
Machine Set up	Number of Setups	1,100.00	150.00	165,000.00
Quality Control	Number of output Units (1 inspection for every 40 units)	409.09	500.00	204,545.45
Rent & Other fixed costs	Direct Labor Costs	2.50	600,000.00	1,500,000.00
Total Cost assigned				2,097,727.27	K
Units produced				10,000.00	L
Costs per unit				209.77	M=K/L

Answer 3
Product cost- ABC System	Amount $	Note
Direct Materials	150.00
Direct Labor	60.00
Allocated OH per unit	209.77	See M
Product cost	419.77

Yes the results would change if we used the number of inspections as the cost driver for quality control instead of number of unit. Cost per unit will decrease by $ 9.55.