Reference no: EM131198869

Cases for Management Decision Making

case 2: Greetings Inc : Activity-Based Costing Solution

This case focuses on decision-making benefits of activity-based costing relative to the traditional approach. It also offers an opportunity to discuss the cost/ benefit trade-off between simple ABC systems versus refined systems, and the potential benefit of using capacity rather than expected sales when allocating fixed overhead costs. (Related to Chapter 4, Activity-Based Costing.)

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, steelframed 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?

Attachment:- Cases for Management Decision Making.rar