Solved: ABC implementation ethics CMA adapted

ABC implementation ethics CMA adapted

ABC, implementation, ethics. (CMA, adapted) Applewood Electronics, a division of Elgin

Corporation, manufactures two large-screen television models: the Monarch, which has been
produced since 2006 and sells for $900, and the Regal, a newer model introduced in early 2009
that sells for $1,140. Based on the following income statement for the year ended November 30,
2010, senior management at Elgin have decided to concentrate Applewood’s marketing
resources on the Regal model and to begin to phase out the Monarch model because Regal
generates a much bigger operating income per unit.

Details for cost of goods sold for Monarch and Regal are as follows:

Applewood’s controller, Susan Benzo, is advocating the use of activity-based costing and
activity-based management and has gathered the following information about the company’s
manufacturing overhead costs for the year ended November 30, 2010.

After completing her analysis, Benzo shows the results to Fred Duval, the Applewood division
president. Duval does not like what he sees. “If you show headquarters this analysis, they are
going to ask us to phase out the Regal line, which we have just introduced. This whole costing
stuff has been a major problem for us. First Monarch was not profitable and now Regal.”
“Looking at the ABC analysis, I see two problems. First, we do many more activities than the
ones you have listed. If you had included all activities, maybe your conclusions would be
different. Second, you used number of setups and number of inspections as allocation bases.
The numbers would be 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 I
believe you ought to make some adjustments to our current numbers to compensate for these
issues. I know you can do better. We can’t afford to phase out either product.”
Benzo knows that her numbers are fairly accurate. As a quick check, she calculates the
profitability of Regal and Monarch using more and different allocation bases. The set of activities
and activity rates she had used results in numbers that closely approximate those based on
more detailed analyses. She is confident that headquarters, knowing that Regal was introduced
only recently, will not ask Applewood to phase it out. She is also aware that a sizable portion of
Duval’s bonus is based on division revenues. Phasing out either product would adversely affect
his bonus. Still, she feels some pressure from Duval to do something.
Required
1. Using activity-based costing, calculate the gross margin per unit of the Regal and Monarch
models.
2. Explain briefly why these numbers differ from the gross margin per unit of the Regal and
Monarch models calculated using Applewood’s existing simple costing system.

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 3. Comment on Duval’s concerns about the accuracy and limitations of ABC.
4. How might Applewood find the ABC information helpful in managing its business?
5. What should Susan Benzo do in response to Duval’scomments?

ABC implementation ethics CMA adapted

ANSWER
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