Great Deal! Get Instant $10 FREE in Account on First Order + 10% Cashback on Every Order Order Now

Word count: 2000 words approximately. In a report format. Beztec Limited produces two models of Printers: the Lexon, which Beztec has produced since 2014 and sells for $990; and the Protox, a newer...

1 answer below »

Word count: 2000 words approximately. In a report format.

Beztec Limited produces two models of Printers: the Lexon, which Beztec has produced since 2014 and sells for $990; and the Protox, a newer model introduced in 2016 that sells for $1254. Based on the following income statement for the year ended 31 December 2017, senior management at Beztec have decided to concentrate marketing resources on the Protox model and to begin to phase out the Lexon model because the Protox generates a much bigger operating profit per unit.

Beztec Limited

Income statement for the financial year ended 31December 2017

Lexon

Protox

Total

Revenues

$ XXXXXXXXXX

$ XXXXXXXXXX

$ XXXXXXXXXX

Cost of goods sold

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

Gross margin

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

Selling and administrative expense

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

Operating income

$ XXXXXXXXXX

$643 500

$ XXXXXXXXXX

Units produced and sold

24 000

6 000

Operating income per unit sold

$71.50

$107.25

Details for cost of goods sold for Lexon and Protox are:

Lexon

Protox

Costs

Total

Per unit

Total

Per unit

Direct materials

$ XXXXXXXXXX

$228.80

$ XXXXXXXXXX

$642.40

Direct production laboura

475 200

19.80

277 200

46.20

Machineb

XXXXXXXXXX

158.40

475 200

79.20

Total direct

$ XXXXXXXXXX

$407.00

$ XXXXXXXXXX

$767.80

Production overheadc

$ XXXXXXXXXX

$220.00

$660 000

$110.00

Total cost of goods sold

$ XXXXXXXXXX

$627.00

$ XXXXXXXXXX

$877.80

a Lexon requires 1.5 hours per unit and Protox requires 3.5 hours per unit. The direct production labour rate is $13.20 per hour.

bMachine costs include lease costs of the machine, repairs and maintenance. Lexon requires 8 machine-hours per unit and Protox requires 4 machine-hours per unit. The machine-hour rate is $19.80 per hour.

c Production overhead costs are allocated to products based on machine-hours at the rate of $27.50 per hour.

Beztec’s management accountant, Sue Smith, is advocating the use of activity-based costing and activity-based management and has gathered the following information about the company’s production overhead costs for the year ended 31December 2017.

Activity-cost-driver quantities

Activity-cost driver (driver quantity)

Total activity costs

Lexon

Protox

Total

Soldering (number of solder points)

$ XXXXXXXXXX

XXXXXXXXXX

433 125

XXXXXXXXXX

Shipments (number of shipments)

XXXXXXXXXX

18 225

4 275

22 500

Quality control (number of inspections)

XXXXXXXXXX

63 225

23 963

87 188

Purchase orders (number of orders)

XXXXXXXXXX

90 113

123 727

213 840

Machine power (machine-hours)

71 280

198 000

18 000

216 000

Machine set-ups (number of set-ups)

928 125

18 000

15 750

33 750

Total production overhead

$ XXXXXXXXXX

After completing her analysis, Smith shows the results to Steven Kay, the CEO of Beztec. Kay does not like what he sees. ‘If you show headquarters this analysis, they are going to ask us to phase out the Protox line, which we have just introduced. This whole costing stuff has been a major problem for us. First, Lexon was not profitable and now Protox.

‘Looking at the ABC analysis, I see 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. We can’t afford to phase out either product, please alter the costs produced by the ABC system.’

Smith knows that her numbers are fairly accurate. As a quick check, she calculates the profitability of Lexon and Protox using more and different activity drivers. 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 Protox was introduced only recently, will not phase out Protox. She is also aware that a sizeable portion of Kay’s bonus is based on division revenues. Phasing out either product would adversely affect his bonus. Still, she feels some pressure from Kay to do something. She asks for your advice.

Required

1. Discuss the importance of accurate product costing. In your discussion you should highlight the problems associated with using traditional costing system which Beztec has been using.

2. Calculate the cost driver rates for the various activities identified in the activity-based costing (ABC) system.

3. Calculate the cost of each model under activity based costing.

4. Complete a profitability analysis by calculating the gross profit and gross profit percentage per unit for both models under ABC system.

5. Advise Smith on how she should respond to Kay’s suggestion that she alter the costs produced by the ABC system. You should discuss APES 110 Code of Ethics for Professional Accountants.

6. Using a predetermined overhead rate to allocate overhead cost will most probably result in over/under allocation of overhead coats. Explain why this may happen and three ways to dispose the amount of over/under applied overhead costs.

Answered Same Day Sep 09, 2020

Solution

Aarti J answered on Sep 12 2020
140 Votes
Activity based costing
Course Name
Course Date
Student’s Name
Activity based costing
In the given case, Beztec Limited is the company which has been using traditional costing to calculate the cost of its two major products i.e. Lexon and Protox. Lexon printer is being sold at the selling price of $990 while Protox is being sold at the price of $1254. Despite of the high sales the company is not able to have high profits. To analyze the costs, the company plans to analyze the cost of the products using activity based costing.
Answer 1: Product costing
Product costing is the total cost of production of the products manufactured by the company. It is important for the company to know the accurate cost of manufacturing so that the company can know that how much cost in respect to materials, labor and overhead is being put on a product. With this the company will also be able to price the product with the required margin. In the cu
ent scenario, the company uses the overhead rate based on the machine hours to allocate the cost of the products that are produced by the company. Machine hours used by Lexon is 1.5 hours per unit while Protox uses 3.5 hours per unit.
The traditional costing is based on the overhead like labor hours or machine hours and do not consider the activities which are used by the company to produce the products. This gives inaccurate cost for the products produced. Traditional costing is also quite simple to used and just uses one base to allocate the cost.
Under the activity based costing, the company recognizes different activities which are incu
ed in producing a product and with the cost drivers, the activity rate is calculated and analysed and on the basis of the cost drivers, the company allocates the overhead costs.
Answer 2: Calculating the cost driver rates
Cost driver rates is calculated under the activity based costing as:
Activity rate is calculated as = Estimated costs / Total activity
    
    Activity-cost-driver quantities
    Activity-cost driver (driver quantity)
    Total activity costs
    Lexon
    Protox
    Total
    Soldering (number of solder points)
    1165725
    133125
    433125
    566250
    Shipments (number of shipments)
    1064250
    18225
    4275
    22500
    Quality control (number of inspections)
    1534500
    63225
    23963
    87188
    Purchase orders (number of orders)
    1176120
    90113
    123727
    213840
    Machine power (machine-hours)
    71280
    198000
    18000
    216000
    Machine set-ups (number of set-ups)
    928125
    18000
    15750
    33750
    Total production overhead
    5940000
    
    
    
    Activity-cost driver (driver quantity)
    Total activity costs
    Total
    Activity rate
    Soldering (number of solder points)
    1165725
    566250
     $ 2.06
    Shipments (number of shipments)
    1064250
    22500
     $ 47.30
    Quality control (number of inspections)
    1534500
    87188
     $ 17.60
    Purchase orders (number of orders)
    1176120
    213840
     $ 5.50
    Machine power (machine-hours)
    71280
    216000
     $ 0.33
    Machine set-ups (number of set-ups)
    928125
    33750
     $ 27.50
    Total production overhead
    5940000
    
    
    Activity-cost driver (driver quantity)
    Activity rate
    Activity of Lexon
    Total...
SOLUTION.PDF

Answer To This Question Is Available To Download

Related Questions & Answers

More Questions »

Submit New Assignment

Copy and Paste Your Assignment Here