Case 1 â 4D Entertainment
Prob 2-2A_Farina Bay’s _Job Costing
July 6, 2018ETHC 445 Week 2 Discussion – Human Nature in Ancient & Medieval Ethics
July 6, 2018Case 1 â4D Entertainment Due on
Jan 23, 2015
You are a Consultant for the
professional service firm, BUSI 2083 LLP. Your firm specializes in providing a
wide 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 Entertainmentâs marketing resources
on the Pinnacle model and begin to phase out the Zenith model.
Additional Information:
4D Entertainment
Income Statement
For the Year Ended November 30, 2014
Zenith
Pinnacle
Total
Sales
$30,600,000
$4,400,000
$35,000,000
COGS
19,890,000
3,080,000
22,970,000
Gross Margin
10,710,000
1,320,000
12,030,000
Selling and Admin Expense
8,032,500
925,000
8,957,500
Operating Income
$2,677,500
$395,000
$3,072,500
Units Sold
18,000
2,000
Operating Income per Unit Sold
$148.75
$197.50
Unit costs for Zenith and Pinnacle
are as follows:
Zenith
Pinnacle
Direct Material
$540.00
$1,089.00
Direct Labor
Zenith (2.5 hours x $18 per hr)
45.00
Pinnacle (7.0 hours x $18 per hr)
126.00
Machine costs*
Zenith (8 hours x $25 per hr)
200.00
Pinnacle (5 hours x $25 per hr)
125.00
Other Manufacturing Overhead**
320.00
200.00
Total
$1,105.00
$1,540.00
*Machine costs include leasing of the
machine, repairs, and maintenance.
** Other manufacturing overhead is
allocated on the basis of machine hours at a rate of $40 per machine hour.
4Dâs 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
companyâs manufacturing overhead costs for the year ended November 30, 2014.
Units of Cost Driver
Total Activity Costs
Zenith
Pinnacle
Soldering
$1,872,400
1,296,000
214,000
Shipments
1,480,000
1,500
500
Quality Control
1,749,600
54,000
18,000
Purchase Orders
582,400
16,640
4,160
Machine Power
61,600
144,000
10,000
Machine Set-up
414,000
360
100
Total Manufacturing Overhead
$6,160,000
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
POâs, 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. âIf 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.
âLooking 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 canât afford to phase out either product.â
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
Wardenâs 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 Entertainmentâs existing costing system.
3. Comment on Wardenâs 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?