ACC2200 Study Guide - Final Guide: Activity-Based Costing, Cost Driver, Management Accounting
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ZHOU CORPORATION
The ZHOU CORPORATION manufactures two types of chairs, Alpha and Beta. Alpha has a complex design. Beta is simpler to manufacture. Last year ZHOU had the following revenues and costs:
Alpha | Beta | Total | |
Revenue | $195,000 | $184,000 | $379,000 |
Direct materials | 55,000 | 50,000 | 105,000 |
Direct labor | 40,000 | 20,000 | 60,000 |
Indirect costs | |||
Administration | $19,500 | ||
Production setup | 45,000 | ||
Quality control | 30,000 | ||
Sales and marketing | 60,000 |
ZHOU currently uses direct labor costs to allocate all indirect costs, but management is considering implementing an ABC system. After interviewing the sales and production staff, management decides to allocate administrative costs on the basis of direct labor costs but to use the following bases to allocate the remaining costs:
Activity | Cost Driver | Alpha | Beta |
Production setup | Number of production runs | 10 | 20 |
Quality control | Number of inspections | 40 | 40 |
Sales and marketing | Number of advertisements | 12 | 48 |
REQUIRED:
Develop a complete income statement using ABC and the given cost drivers.
Write a report indicating how management could use activity based management (ABM) to reduce costs.
Restate the income statement for ZHOU using direct labor costs as the only indirect cost allocation base.
Write a report to management stating why product line profits differ using ABC costing compared to the traditional approach. Indicate whether ABC provides more helpful information and why. Indicate in your report how the use of labor based overhead allocation could result in ZHOU management making suboptimal decisions.