Author Question: Luzent Company produces two types of entry doors: Deluxe and Standard. The assignment basis for ... (Read 82 times)

Jipu 123 · **on:** Jul 5, 2018

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

jaymee143 · **Reply #1 on:** Jul 5, 2018

Answer to Question 1

Answer:
a. Currently estimated deluxe-entry door total cost per unit is 260 = 180 + 80.
Currently estimated standard-entry door total cost per unit is 250 = 130 + 120.

Currently estimated deluxe-entry door profit per unit is 390 = 650 260.
Currently estimated standard-entry door profit per unit is 225 = 475 250.

b. Support manufacturing costs are currently allocated based on direct labor dollars. Because the deluxe doors are manufactured using the new robotics system, it appears that less direct labor is needed to manufacture each unit in the deluxe product line.

c. When ABC systems get very detailed and more cost pools are created, more allocations are necessary to calculate activity costs for each cost pool, which increases the chances of misidentifying the costs of different activity cost pools. For example, supervisors are more prone to incorrectly identify the time they spend on different activities if they have to allocate their time over five activities rather than only two activities.
Occasionally, managers are also forced to use allocation bases for which data are readily available rather than allocation bases they would have liked to use. When incorrect cost-allocation bases are used, activity-cost information can be misleading. For example, if the cost per load moved decreases, a company may conclude that it has become more efficient in its materials-handling operations. In fact, the lower cost per load may have resulted solely from moving many lighter loads over shorter distances.

d. First, the sales-mix strategy ought to consider the current and future market demands for the two types of entry doors. Other considerations include the capacity-related constraints of the robotics system, other equipment, and the facilities. The fact that customers may be willing to pay more for the deluxe doors should be considered when evaluating the profitability of each product line. Costs do not drive a sales-mix strategy.

e. In many situations, achieving a significant change overnight is difficult. However, showing how ABC information has helped improve a process and save costs, even if only in small ways, motivates the team to stay on course and build momentum. The credibility gained from small victories leads to additional and bigger improvements involving larger numbers of people and different parts of the organization. Eventually ABC becomes rooted in the culture of the organization. Sharing short-term successes also helps motivate employees to be innovative.

Answer to Question 2

True