Luzent Company produces two types of entry doors: Deluxe and Standard. The assignment basis for support costs has been direct labor dollars. For 2015, Luzent compiled the following data for the two products:
Deluxe Standard
Sales units 50,000 400,000
Sales price per unit 650.00 475.00
Prime costs per unit 180.00 130.00
Direct materials cost per unit 95.00 75.00
Direct labor costs per unit 75.00 55.00
Manufacturing support costs per unit 80.00 120.00
Last year, Luzent Manufacturing purchased an expensive robotics system to allow for more decorative door products in the deluxe product line. The CFO suggested that an ABC analysis could be valuable to help evaluate a product mix and promotion strategy for the next sales campaign. She obtained the following ABC information for 2015:
Activity Cost Driver Cost Total Deluxe Standard
Setups of setups 500,000 500 400 100
Machine-related of machine hours 44,000,000 600,000 300,000 300,000
Packing of shipments 5,000,000 250,000 50,000 200,000
Required:
a. Using the current system, what is the estimated
1. total cost of manufacturing one unit for each type of door?
2. profit per unit for each type of door?
b. Using the current system, estimated manufacturing overhead costs per unit are less for the deluxe door (80 per unit) than the standard door (120 per unit). What is a likely explanation for this?
c. ABC systems may result in misallocation of indirect costs. Do you agree? Give reasons for your answer.
d. What considerations need to be examined when determining a sales mix strategy?
e. While implementing an ABC system for the first time, achieving a significant change overnight is difficult and this may demotivate employees. How can managers overcome this problem?
Question 2
Accrued taxes payable are generally reported on the balance sheet as a current liability.
a. True
b. False
Indicate whether the statement is true or false