ACCT 2102
MANAGERIAL ACCOUNTING
Managerial Accounting, Tools for Decision Making, Fourth Edition (4th), by Jerry J. Weygandt, Donald E. Kieso, & Paul D. Kimmel (ISBN 978-0-470-11726-2)
Case for Management Decision Making
ACCT 2102 Case 2: Greetings Inc : Activity-Based Costing Solution
Click here for the SOLUTION
President of Greetings Inc., created Wall Décor unit of Greetings 3 years ago to increase company's revenue & profits. Even though Wall Décor's revenues have grown quickly, Greetings appears to be losing money on Wall Décor. President has hired you to provide consulting services to Wall Décor's management to make it a profitable business unit.
From your conversations with store managers you learn that the individual Greetings stores are very happy with the Wall Décor arrangement. The stores are generating additional sales revenue from the sale of unframed and framed prints. The online nature of the product enables them to generate revenue without the additional cost of carrying inventory. Wall Décor sells unframed and framed prints to each store at product cost plus 20%. A 20% mark-up on products is a standard policy of all Greetings intercompany transactions. Each store is allowed to add an additional mark-up to the unframed and framed print items according to market pressures. That is, the selling price charged by each store for unframed and framed prints is determined by each store manager. This policy ensures competitive pricing in the respective store locations, an important business issue because of the intense mall competition.
AND SO ON
Illustration CA 2-1 Information for activity 1
Illustration CA 2-2 Information for activity 2
Illustration CA 2-3 Information for activity 3
Illustration CA 2-4 Information for activity 4
Illustration CA 2-5 Summary of overhead costs and cost drivers
Exercises
Instructions
Answer the following questions.
1 Identify two reasons why an activity-based costing system may be appropriate for Wall Décor.
2 Compute the activity-based overhead rates for each of the four activities.
3 Compute the product cost for the following three items using ABC. (Review Case 1 for additional information that you will need to answer this question.)
(a) Lance Armstrong unframed print (base cost of print $12)
(b) John Elway print in steel frame, no mat (base cost of print $16)
(c) Lambeau Field print in wood frame with mat (base cost of print $20)
4 In Case 1 for Greetings, the overhead allocations using a traditional volume-based approach were $3.36 for Lance Armstrong, $4.48 for John Elway, and $5.60 for Lambeau Field. The total product costs from Case 1 were Lance Armstrong $17.36, John Elway $33.48, and Lambeau Field $48.10. The overhead allocation rate for unframed prints, such as the unframed Lance Armstrong print in question 3, decreased under ABC compared to the amount of overhead that was allocated under the traditional approach in Case 1. Why is this the case? What are the potential implications for the company?
5 Explain why the overhead cost related to website optimization was first divided into two categories (unframed prints and framed prints) and then allocated based on number of prints.
6 When allocating the cost of website optimization, the decision was made to initially allocate the cost across two categories (unframed prints and framed prints) rather than three categories (unframed prints, steel-framed prints, and wood-framed prints with matting). Discuss the pros and cons of splitting the cost between two categories rather than three.
7 Discuss the implications of using operating capacity as the cost driver rather than the expected units sold when allocating fixed overhead costs.
8
(a) Allocate the overhead to the three product categories (unframed prints, steel-framed prints, and wood-framed prints with matting), assuming that the estimate of the expected units sold is correct and the actual amount of overhead incurred equaled the estimated amount of $375,200.
(b) Calculate the total amount of overhead allocated. Explain why the total overhead of $375,200 was not allocated, even though the estimate of sales was correct. What are the implications of this for management?
