3. According to the activity-based costing analysis, Classic Windows may
be losing money dealing with Kuszik Builders. Both the red and yellow
margins are negative. This means that if Classic Windows could actually
avoid the yellow costs (or redeploy these resources to more profitable
uses) by dropping Kuszik Builders as a customer, the company would be
better off without this customer.
The activity-based costing and traditional costing systems do not agree
concerning the profitability of these two customers. The traditional cost-
ing system regards Kuszik Builders as a profitable customer and West-
ern Homes as a money-losing customer. The activity-based costing sys-
tem comes to exactly the opposite conclusion. The activity-based cost-
ing system provides more useful data for decision making for several
reasons. First, the traditional costing system assigns all manufacturing
costs to products—even costs that are not actually caused by the prod-
ucts such as costs of idle capacity and organization-sustaining costs.
Second, the traditional costing system excludes all nonmanufacturing
costs from product costs—even those that are caused by the product
such as some office expenses. Third, the traditional costing system
spreads manufacturing overhead uniformly among products based on
direct labor-hours. This penalizes high-volume products with large
amounts of direct labor-hours. Low-volume products with relatively
small amounts of direct labor-hours benefit since the costs of batch-level
activities like processing orders are pushed onto the high-volume prod-
ucts.
Case 8-34 (90 minutes)
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