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Companies design accounting systems to enhance management decision$-$making. This case study provides an opportunity to compare various methods of allocating overhead costs. Please read the case carefully and address the required questions. Please use exact numbers from pictures. Example :

$\backslash$table$[[,$Regular Model,Advanced Model,Deluxe Model$],[\backslash$table$[[$Annual Sales $($units$)],[$Product Costs: Direct$],[$Material$]],20,000,1,000,10,000],[\backslash$table$[[$Product Costs: Direct$],[$Labor$]],$$$20(1$hr at $$20),40(2$hr at $$20),40(2$hr at $$20)],[\backslash$table$[[$Product Costs:$],[$Manufacturing$],[$Overhead$*]],170(1$hr at $$170),340(2$hr at $$170),340(2$hr at $$170)],[$Total Product Cost,$$210,$$$430,$$$464]]$ Manufacturing$-$Overhead Budget

Page $1$ of $3$ Direct$-$Labor Budget Page $2$ of $3$Direct Labor Hours:

Regular Model: $1$ hour

Advanced Model: $2$ hours

Deluxe Model: $2$ hours

Traditional vs$.$ Activity$-$Based Costing Methods

ABC Corporation produces electric pumps and offers three models: regular, advanced, and deluxe. The company currently uses a job$-$order costing system to assign manufacturing overhead costs to each model, based on direct labor hours. Below is key information related to product costs and annual sales.

Predetermined overhead rate: Budgeted overhead divided by budgeted direct labor hours

$$7,140,000-$: $42,000$ hours $=$ $$170$ per hour

For the past $10$ years, the company has set the target price for each model at $110\%$ of its full product cost. However, ABC Corporation has encountered increasing price competition from offshore companies for its regular pump model. Consequently, the price for the regular model has been lowered to $$220.$

In a recent meeting, the company president raised concerns, stating:

"Why can$$t we compete with these other companies? They are selling pumps similar to our regular model for $$212,$ just two dollars more than our production cost. Are we really that inefficient? What$$s going on$?"$

The controller replied:

$$I believe this stems from our outdated product$-$costing system. When I joined the company last year, I identified this issue, but the decision was made to maintain the current system. I think our costing system is distorting product costs. Let me run some numbers to illustrate my point.$$

With the president$$s approval, the controller collected data to implement an activity$-$based costing $($ABC$)$ system. This data was presented in a table, showing the percentage of each cost driver consumed by each product line.

Required:

Please use the numbers from the pictures for calculations. Thank you

Calculate the target prices for the three pump models using the traditional, volume$-$based product$-$costing system.

Compute the new product costs for the three models using the data gathered by the controller $($round to the nearest cent$).$

Determine the new target prices for the three products using the activity$-$based costing system and compare this new target price with the current actual selling price of the regular model pump.

Write a memo to the company president explaining the impact of the firm$$s traditional volume$-$based product$-$costing system.

Discuss strategic options available to management. What do you recommend and why?

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