Reference no: EM133103554

Question - Walter & Werner Corp. (WWC) was created by two brothers to manufacture board games. In the manufacturing process used by WWC, there are both direct costs and indirect costs. WWC has had difficulty determining the best way of allocating indirect costs to its games and determining its actual profit by type of game. WWC is currently accumulating all indirect manufacturing costs into one cost pool and allocating them based on the number of games produced. Games are sold by commissioned salespeople to toy, game, and hobby shops across Canada.

WWC's management is finding its salespeople are dissatisfied with how they are compensated, as they do NOT feel the commission paid reflects the amount of work required to sell expensive, more detailed games compared to the smaller, simpler games.

WWC's manufacturing process is housed in a single manufacturing facility with several different departments, including the following:

-direct materials department: purchasing and handling of small plastic game pieces, stainless steel game pieces, cardboard game components, and wooden game boards

-paint department: spray painting of game boards by machines, and individual craftspeople hand painting game boards

-packaging department: machines packaging generic game components, and individuals working to ensure more complicated and individualized game components are properly organized

-shipping department: shrink-wrapping games, arranging games into batches, and loading crates of packaged games into trucks

WWC's management understands that its higher-end games, targeted at collectors and avid gamers, are using more time and elements in the manufacturing process but is unsure how to go about assessing and making changes to its costing system. Further, WWC is unsure how to better manage operations and its sales force to better align rewards with work done.

Required -

a) Describe activity-based costing (ABC) to WWC's management, and explain if it would be possible for WWC to implement ABC based on its operations.

b) Provide two differences between WWC's current costing system and ABC.

c) Explain the objective of ABC and provide an example of how this could benefit WWC.

d) Identify the five elements of the ABC cost hierarchy and provide an example for each that is applicable to WWC.