EXERCISE 8-21 (CONTINUED)

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)