Managerial Decision Making, Case 2, Greetings Inc. Activity Based Costing
|Case 2 |
| Greetings Inc.: Activity-Based Costing |
|This case is from the book: Managerial Accounting: Tools for Business Decision |
|Making, 5th Edition |
|Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso |
|©2010 |
|And was answered by some students. |
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1. Activity Based Costing benefits businesses that are more complex in nature. In this case, Greetings. INC has added a new product line, Wall Decor, which permits them to grow without expanding their physical stores; however, they have significantly raised their overhead costs by multiplying their cost drivers. Not to mention the fact that they have incorporated a largely automated system into their product line, which we know calls for an ABC system. The main reason to move to ABC though, I’d say, would be because it will allow management to make better decisions and move away from the “cash machine” and “lemonade stand” metaphor simply because overhead costs will be allocated in such a way that corresponds to either framed or unframed prints instead of considering the same overhead for both products. By doing so managers will be able to price the prints competitively while still maintaining a profitable margin. An activity-based costing system may be appropriate for Wall Décor, when overhead allocation based job-order costing provides product cost distortion. Wall Décor should change its costing system for selling its high volume produced products whereas low-volume produced products have good profit.
2. The activity-based overhead rates:
| Activity | Estimated Overhead | Expected use of Cost Drivers | Activity-Based Overhead Rates |
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|Picking prints |$36,000 |102,000 prints |$0.30 per print |
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|Inventory selection and management |$91,700 |131,000 components |$0.70 per component |
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