Question -
Browns Electronics Company is a manufacturer of small screen television models. The company produces three models called High definition (HD) televisions, LED-LCD televisions and Smart curved televisions. The company uses a job costing system with manufacturing overhead applied on the basis of direct labour hours. The system has been in place with not much change for the past 10 years.
Brown Electronics Company's product costs and annual sales data are as follows:
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High-definition model
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LED-LCD model
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Smart-curved model
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Annual sales (units)
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30 000
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1 500
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15 000
|
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Product costs:
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Raw material
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$15.00
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$37.50
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$63.00
|
|
Direct labour
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$15.00 (0.5hour @ $30)
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$30.00 (1 hour @ $30)
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$30.00 (1 hour @ $30)
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|
Manufacturing overhead *
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$127.50
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$255.00
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$255.00
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Total product cost
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$157.50
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$322.50
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$348.00
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*Calculation of predetermined overhead rate:
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Manufacturing overhead budget: Depreciation, machinery
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$ 2 220 000
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Maintenance, machinery
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180 000
|
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Depreciation, taxes and insurance for factory
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450 000
|
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Engineering
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525 000
|
|
Purchasing, receiving and shipping
|
375 000
|
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Inspection and repair of defects
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562 500
|
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Material handling
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600 000
|
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Miscellaneous manufacturing overhead costs
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442 500
|
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Total
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$ 5 355 000
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Predetermined overhead rate:
Budgeted overhead = $ 5 355 000 = $255 per hour
Budgeted direct labour hours 21 000 hours
For the past 10 years, Brown Electronics Company's pricing formula has been to set each product's budgeted prices at 115 percent of its full product cost. Lately, however, the high-definition model has come under increasing price pressure from overseas competitors. As a result of this increased competition, the price on the High-definition model has been lowered to $175.00.
Brown Electronics Company's CEO recently asked the financial controller, 'Why can't we compete with these other companies? They are selling their high definition televisions for $165.00. That is only a few dollars more than our production cost. Are we really that inefficient?'
The financial controller responded by saying, 'I think this is owing to an outdated product costing system. As you may remember, I raised a red flag about our existing product costing system last year. In my opinion, our product costing system is distorting and misrepresenting our product costs. Let me run a few numbers to demonstrate what I mean.'
After getting the approval of the CEO, the financial controller compiled the basic data needed to implement an activity based costing system.
These data are displayed in the following table. The percentages given are the proportion of each activity driver consumed by each product line
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Product lines
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Activity
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Activity driver
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High definition (HD) model
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LED-LCD model
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Smart curved model
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Depreciation, machinery Maintenance, machinery
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Machine time
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40%
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13%
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47%
|
|
Engineering
Inspection and repair of defects
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Engineering hours
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47%
|
6%
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47%
|
|
Purchasing, receiving and shipping
Material handling
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Number of material orders
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47%
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8%
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45%
|
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Depreciation, taxes and insurance for factory
Miscellaneous manufacturing overhead costs
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Factory space usage
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42%
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15%
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43%
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Required:
1. Calculate the budgeted prices for the three models, based on the traditional product costing system.
2. Construct an excel spreadsheet showing new product costs for the three models, based on the new data collected by the financial controller. Round to the nearest cent.
3. Calculate a new budgeted price for the three products, based on the activity based costing system. Compare the new budgeted target price with the current actual selling price for the High-definition model.
4. Refer to the product costs developed in requirement 2 above. Prepare a table showing how Browns Electronics Company's traditional product costing system distorts the product costs of the three television models.