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# Activity-based costing information

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Jog Road Company's cost system assigns MSDA expenses to customers using a rate of 33% of sales revenue. The new CFO has discovered that Jog Roads's customers differ greatly in their ordering patterns and interaction with the company's sales force. Because the CFO believes Jog Road's cost system does not accurately assign MSDA expenses to customers, he developed an ABC system and gathered the following information.

Austin Brooke
Sales \$860,000 \$790,000
Cost of Goods Sold 415,000 380,000
Sales representative travel 10,000 83,000
Service customers 37,000 229,000
Handle customer orders 9,000 26,000
Ship to customers 48,000 150,000

1. Using the current cost system's approach of assigning MSDA expenses to customers using a rate of 33% of sales revenue, determine the operating profit associated with Austin and with Brooke.

Austin ___________________

Brooke ___________________

2. Using the activity-based costing information provided, determine the operating profit associated with Austin and with Brooke.

Austin ___________________

Brooke ___________________

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#### Solution Preview

Jog Road Company's cost system assigns MSDA expenses to customers using a rate of 33% of sales revenue. The new CFO has discovered that Jog Roads's customers differ greatly in their ordering patterns and interaction with the company's sales force. Because the CFO believes Jog Road's cost system does not accurately assign MSDA expenses to customers, he developed an ABC system and gathered the following information.

Austin ...

#### Solution Summary

Solution helps in estimating the profit Using the activity-based costing information provided

\$2.19

## Important information about Traditional costing vs activity based costing

Gigabyte, Inc. manufactures 3 products for the computer industry:
-(product G): annual sales, 8,000 units
-(product T): annual sales, 15,000 units
-(product W): annual sales, 4,000 units
The company uses a traditional, volume-based product-costing system with manufacturing overhead applied on the basis of direct-labor dollars. The product costs have been computed as follows:

Product G Product T Product W
Raw Mat...............\$35.00............................\$52.50...............................\$17.50
Direct Labor..........16.00(.8hr.@\$20).............12.00(.6hr.@\$20)...............8.00(.4hr.@\$20)
Tot. Prod. Cost......\$191.00...........................\$169.50.............................\$95.50

Machine setup..........\$ 5,250
Machinery..................1,225,000
Inspection....................525,000
Material Handling..........875,000
Engineering..................344,750
Total..........................2,975,000

Direct Labor Budget(based on budgeted annual sales)
Product G: 8,000x\$16.00= \$128,000
Product T: 15,000x\$12.00= 180,000
Product W: 4,000x\$8.00= 32,000
Total...........................................\$340,000

Gigabyte's pricing method has been to set a target price equal to 150% of full product cost. However, only product T have been seelling at the target price. The target and actual current prices for all three products are the following

Product G Product T Product W
Product cost.....................\$191.00..............\$169.50.............\$95.50
Target Price.......................286.50................254.25.............143.25
Actual Current selling Price.213.00.................254.25.............200.00

Gigabyte has been forced to lower the prices of product G in order to get orders. In contrast, Gigabyte has raised the price of product W several times, but there has been no apparent loss of sales. Gigabyte, Inc. has been under increasing pressure to reduce the price even further on product G. In contrast, Gigabyte's competitor do not seem to be interested in the market for product W. Gigabyte apparently has this market to itself.

Gigagbytes controller, nan 0'second recently attended a conference at which activity-based costing systems were discussed. In stage one of the ABC project, each cost driver was identified for each activity cost pool. Finnally, the ABC project team compiled data showing the percentage of each cost driver that was consumed by each of Gigabyte's product lines.
These data are summarized as follows:
Activity Cost Pool Cost Driver Product G ProductT Product W
Machine setup number of setups 20% 30% 50%
Machinery machine hrs 25% 50% 25%
Inspection number of inspections 15% 45% 40%
Material Handling raw-material costs 25% 69% 6%
Engineering number of change orders 35% 10% 55%

--Is product G the company's least profitable product?

--Is product W a profitable product for Gigabyte, inc.?

--what are the competitors reactions in regards to gigabyte's pricing strategy?

--What dangers does gigabyte inc. face?

**develop product costs for the tree products on the basis of an activity-based costing system(round to nearest tenth)

**calculate a target price for each product, using gigabyte's pricing formula. Compare new target prices with the current actual selling prices and previously reported product costs.

--construct an excel spreadsheet to solve the above 2(**) show how the solution will change if the inspection activity was divided among the three product in the following manner: product G 20%;product T 40%, and product W, 40%

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