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Manchester Technology, Inc., manufactures several different types of printed circuit boards; however, two of the boards account for the majority of the company$$s sales. The first of these boards, a television circuit board, has been a standard in the industry for several years. The market for this type of board is competitive and price$-$sensitive$.$ Manchester plans to sell $65,000$ of the TV boards in $20$x$1$ at a price of $$150$ per unit. The second high$-$volume product, a personal computer circuit board, is a recent addition to Manchester$$s product line. Because the PC board incorporates the latest technology, it can be sold at a premium price. The $20$x$1$ plans include the sale of $40,000$ PC boards at $$300$ per unit.

Manchester$$s management group is meeting to discuss how to spend the sales and promotion dollars for $20$x$1.$ The sales manager believes that the market share for the TV board could be expanded by concentrating Manchester$$s promotional efforts in this area. In response to this suggestion, the production manager said, $$Why don$$t you go after a bigger market for the PC board? The cost sheets that I get show that the contribution from a PC board is significantly larger than the contribution from a TV board. I know we get a premium price for the PC board. Selling it should help overall profitability.$$

The cost$-$accounting system shows that the following costs apply to the PC and TV boards.

PC Board TV Board

Direct material $ $140$ $ $80$

Direct labor $4$ hr$.1\mathrm{.}5$ hr$.$

Machine time $1\mathrm{.}5$ hr$.0\mathrm{.}5$ hr$.$

Variable manufacturing overhead is applied on the basis of direct$-$labor hours. For $20$x$1,$ variable overhead is budgeted at $$1,120,000,$ and direct$-$labor hours are estimated at $280,000.$ The hourly rates for machine time and direct labor are $$10$ and $$14,$ respectively. The company applies a material$-$handling charge at $10$ percent of material cost. This material$-$handling charge is not included in variable manufacturing overhead. Total $20$x$1$ expenditures for direct material are budgeted at $$10,800,000.$

Andrew Fulton, Manchester$$s controller, believes that before the management group proceeds with the discussion about allocating sales and promotional dollars to individual products, it might be worthwhile to look at these products on the basis of the activities involved in their production. Fulton has prepared the following schedule to help the management group understand this concept.

$$Using this information,$$ Fulton explained, $$we can calculate an activity$-$based cost for each TV board and each PC board and then compare it to the standard cost we have been using. The only cost that remains the same for both cost methods is the cost of direct material. The cost drivers will replace the direct labor, machine time, and overhead costs in the old standard cost figures.$$

Budgeted Cost Cost Driver Budgeted Annual Activity

for Cost Driver

Procurement $ $400,000$ Number of parts $4,000,000$ parts

Production scheduling $220,000$ Number of boards $110,000$ boards

Packaging and shipping $440,000$ Number of boards $110,000$ boards

Total $ $1,060,000$

Machine setup $ $446,000$ Number of setups $278,750$ setups

Hazardous waste disposal $48,000$ Pounds of waste $16,000$ pounds

Quality control $560,000$ Number of inspections $160,000$ inspections

General supplies $66,000$ Number of boards $110,000$ boards

Total $ $1,120,000$

Machine insertion $ $1,200,000$ Number of parts $3,000,000$ parts

Manual insertion $4,000,000$ Number of parts $1,000,000$ parts

Wave$-$soldering $132,000$ Number of boards $110,000$ boards

Total $ $5,332,000$

Required per Unit PC Board TV Board

Parts: $5525$

Machine insertions $3524$

Manual insertions $201$

Machine setups $32$

Hazardous waste disposal, in lb$.0\mathrm{.}350\mathrm{.}02$

Inspections $21$

Required:

$1.$ Identify at least four general advantages associated with activity$-$based costing.

$2.$ On the basis of Manchester$$s unit cost data given in the problem, calculate the total amount that each of the two product lines will contribute toward covering fixed costs and profit in $20$x$1.$

$3.$ Using activity$-$based costing, calculate the total amount that each of the two product lines will contribute toward covering fixed costs and profit in $20$x$1.$

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