You are a Consultant for the professional service firm, BUSI 2083 LLP. Your firm specializes in providing awide variety of internal business solutions for different clients. It is your first day on the job and a
Manager asks you for some help with a client in the Technology & Entertainment sector. Eager to please
on your first day, you start reading the background information provided by the Manager.
4D Entertainment, a division of Wave of the Future Corporation, manufactures two large-screen
television models: the Zenith, which has been produced since 2008 and sells for $1,700, and the
Pinnacle, a new model introduced in early 2008, which sells for $2,200. Based on the following income
statement for the year ended November 30, 2014, senior management at Wave of the Future have
decided to concentrate 4D Entertainment’s marketing resources on the Pinnacle model and begin to
phase out the Zenith model.
4D’s controller, Tina Wesley, is advocating the use of activity-based costing (ABC) and activity based
Management (ABM), and has gathered the following information about the company’s manufacturing
overhead costs for the year ended November 30, 2012.
Soldering is based on the number of solder points, shipments based on the number of shipments,
quality control based on the number of inspections, purchase orders based on the number of PO’s,
machine power based on machine hours, machine setups based on the number of setups.
After completing her analysis, Wesley showed the results to Donald Warden, the 4D Entertainment
Division President. Warden did not like what he saw. “If you show headquarters this analysis, they are
going to ask us to phase out the Pinnacle line, which we have just introduced. This whole costing thing
has been a major problem for us. First Zenith was not profitable and now Pinnacle.
“Looking at the ABC analysis, I see two problems. We do many more activities than the ones you have
listed. If you had included all activities, maybe your conclusions would have been different. Second, you
used number of setups and number of inspections as allocation bases. The numbers would have been
different had you used setup hours and inspection hours instead. I know that measurement problems
precluded you from using these other cost allocation bases, but at least you ought to make some
adjustments to our current numbers to compensate for these issues. I know you can do better. We can’t
afford to phase out either product.”
Wesley knew her numbers were fairly accurate. On a limited sample, she had calculated the profitability
of Zenith and Pinnacle using different allocation bases. The set of activities and activity rates she had
chosen resulted in numbers that approximated closely those based on more detailed analyses. She was
confident that headquarters, knowing that Pinnacle was introduced only recently, would not ask 4D
Entertainment to phase it out. She was also aware that a sizable portion of Warden’s bonus was based
on division sales. Phasing out either product would adversely affect the bonus. Still, she felt some
pressure from Warden to do something.
4D Entertainment is unsure of the strategies to properly reflect information for their parent company.
The manager would like the following questions addressed as soon as possible:
REQUIRED
1. Using activity-based costing (ABC), calculate the profitability of the Zenith and Pinnacle models. 2. Explain briefly why these numbers differ from the profitability of the Zenith and Pinnacle models
calculated using 4D Entertainment’s existing costing system.
3. Comment on Warden’s concerns about the accuracy and limitations of ABC.
4. How might 4D Entertainment find the ABC information helpful in managing its business?
5. What should Tiny Wesley do?