Breeden Electronics (A), (B)

Group 5 Members:1. Ceciliachieng ak Sallang2. Shirley Kong Kei Ying3. Sim Sin Chern4. Tan Kah Lim

In early 1999, Breeden Electronics USA, start-up division of a German company.

It plans to produce two products, both electronic signaling devices.

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Miniature signaling device used primarily for remote operation of garage doors.

Consisted of a signal sender, about half the size of a pack of cards, and a receiver.

RC1 Used by a

householder to turn on inside lights when arriving after dark.

More expensive to make since the receiving part was a complete plug-in device.

RC2

Facts October 1999, Breeden’s parent company in

Germany had established a target profit for Breeden of $210,000 for the upcoming year.

Herman Klein, the division president, has asked his controller, Marlene Baer, to compute several breakeven sales figures as they assess the sales level that is necessary to meet the profit target established by the parent company.

A large manufacturer of motorized garage doors had agreed to take a minimum of 100,000 RC1 control units a year. Klein and Baer thought that 120,000 units was a reasonable target for year 2000.

Breeden expected to sell the RC2 unit primarily through mail order catalogues. Klein and Baer projected sales of 60,000 units for year 2000.

Problem Statements

1. The allocation of manufacturing overhead

cost2. How to allocate the cost

of non-production activities to the

production activities

Allocation of Overhead

Direct measures does not exist for the quantity of resources consumed by a particular cost object.

Use of surrogate rather than direct measures.

Basic Concept of Allocation of Overhead

Traditional Costing ABC System

1. Allocate overhead cost directly to the product.

2. Overhead allocation base used:

(a) Direct Labor(b) Units(c) Machine Hours

1. Determine activities to produce cost object.

2. Allocate overhead cost to the activities.

3. Assign the cost of activities to products that require the activity for production.

1. Traditional Costing

Method 1

Overhead cost on Direct Labor

base

RC1 RC2Variable CostManufacturing Costs:PartsDirect LaborSupplies (MOH)Total

$55,000$35,000$13,125

$103,125

$32,000$21,000$7,875

$60,875Fixed CostsTotal $56,875 $34,125

ProfitGross Profit $40,000 $20,000

Calculations

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RC1(35/56) × $21,000= $13,125

RC2(21/56) × $21,000= $ 7,875

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RC1(35/56) × $91,000= $56,875

RC2(21/56) × $91,000= $34,125

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RC1$200,000-$103,125-$56,875= $40,000

RC2$115,000-$60,875-$34,125= $20,000 << Back

Total G.Profit of both products (RC1&RC2)

$40,000 + $20,000 = $60,000

Less:

Selling & Administrative $40,000

Net Profit $20,000

Net Profit

RC1 RC2($103,125 / 200,000)

× 100= 51.56%

($60,875/ 115,000) × 100

= 52.93%

Percentage of Variable Cost:Formula = V/S × 100

RC1

S = V + FS = 51.56S + 56875S – 0.5156S = 568750.4844S = 56875S = 56875/0.4844S = 117413 ÷ $20 = 5871 units

Break Even Analysis

RC2

S = V + FS = 52.93S + 34125 S – 0.5293S = 341250.4707S = 34125S = 34125/0.4707S = 72498 ÷ $23 = 3152 units

Method 2

Overhead cost on Unit base

RC1 (10, 000 units) RC2 (5, 000 units)Sales RC1 (10, 000 x 20) 200, 000RC2 (5, 000 x 23) 115, 000

Variable CostParts 55, 000 32, 000Direct Labour 35, 000 21, 000Supplies (MOH) 13, 125 7, 875 RC1 (21,000 x 2/3) 14, 000 RC2 (21,000 x 1/3) 7, 000Total VC 104, 000 60, 000

Fixed cost(112, 000 – 21, 000) x 2/3 60, 666(112, 000 – 21, 000) x 1/3 30, 333Total FC 60, 666 30, 333

Gross Profit (S-V-F) 35, 333 24, 667

Total G.Profit of RC1 and RC2(35, 333+24, 667)

60, 000

(-) Selling and Administrative 40, 000

Net Profit 20, 000

Net Profit

RC1 RC2BEP: S=V+F (RM)

S = 52% of Sales + 60, 6671S-0.52S = 60, 667 0.48S = 60, 667 S = 60, 667/0.48 S = RM126, 390

S = 52.17% of Sales + 30, 3331S-0.5217S = 30, 333 0.4783S = 30, 333 S = 30, 333/0.4783 S = RM63, 418

BEP: Sales/SP (unit)

123, 387/20 = 6, 319 units

63, 418/23= 2,757 units

RC1 RC2

% of VC= V/S x 100

104, 000 / 200, 000 x 100 = 52%

60, 000 / 115, 000 x 100= 52.17%

% of Variable Cost

Break Even Point

Method 3

Variable Overhead on unit base

Fixed Overhead on direct labour base

RC1 (10, 000 units) RC2 (5, 000 units)Sales RC1 (10, 000 x 20) 200, 000RC2 (5, 000 x 23) 115, 000

Variable CostParts 55, 000 32, 000Direct Labour 35, 000 21, 000Supplies (MOIH) 13, 125 7, 875 RC1 (21,000 x 2/3) 14, 000 RC2 (21,000 x 1/3) 7, 000Total VC 104, 000 60, 000

Fixed cost(112, 000 – 21, 000) x 35/56 56,875(112, 000 – 21, 000) x 21/56 34, 125Total FC 56, 875 34, 125

Gross Profit (S-V-F) 39, 125 20,875

Total G.Profit of RC1 and RC2(39, 125+20, 875)

60, 000

(-) Selling and Administrative 40, 000

Net Profit 20, 000

Net Profit

RC1 RC2

BEP: S=V+F (RM)

S = 52% of Sales + 56, 875 1S-0.52S = 56, 875 0.48S = 56, 875 S = 56, 875 /0.48 S = RM118, 490

S = 52.17% of Sales + 20, 8751S-0.5217S = 20, 875 0.4783S = 20, 875 S = 20, 875/0.4783 S = RM43, 644

BEP: Sales/SP (unit)

118, 490/20 = 5, 924 units

43, 644/23= 1, 897 units

RC1 RC2

% of VC= V/S x 100

104, 000 / 200, 000 x 100 = 52%

60, 000 / 115, 000 x 100= 52.17%

% of Variable Cost

Break Even Point

Compare BEP (units) for three overhead allocation methods:

Break Even Point

RC1 (Units)

RC2 (Units)

Method 1 5,871 3,152

Method 2 6,319 2,757

Method 3 5,924 1,897

Traditional costing

Margin of SafetyMOS

RC1 (%)

RC2 (%)

M1 (10, 000-5,871)/10, 000= 41.29%

(5, 000-3,152)/5, 000= 36.96%

M2 (10, 000-6,319)/10, 00= 36.81%

(5, 000-2,757)/5, 000= 44.86%

M3 (10, 000-5,924)/10, 000= 40.76%

(5,000-1,897)/5,000= 62.06%

2. Activity-Based Costing for Overhead

Baer uses an Activity-based costing system to allocate overhead costs. She groups overhead expense by activity and then allocates them to the two products.

• Fabrication• Assembly • Packing and shipping• Quality control• General operations

Overhead expense distributed to 5 activities:

RC1 RC2 TotalSales Revenue $200,000 $115,000 $315,000

Variable CostParts 55,000 32,000 87,000Direct labor 35,000 21,000 56,000Supplies (1.37x10,000) 13,700 (1.46x5,000) 7,300 21,000

103,700 60,300 164,000Fixed Cost 55,143 35,857 91,000Total manufacturing cost 158,843 96,157 255,000

Selling and administrative 40,000

Total expenses $295,000

Profit (315,000-295,000)

$20,000

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Fabrication 39,000 x 18,500 = $12,884 56,000Assembly 39,000 x 30,000 = $20,893 56,000Packing and Shipping 39,000 x 7,500 = $5,223 56,000

Calculation of Fixed Cost:

i. Distribute the general operations overhead of $39,000 in proportion to total direct labor for all three activities.

ii. Added the proportion of general operations overhead to each of the three activities.

Fabrication 28,000 + 12,884 = $40,884

Assembly 17,000 + 20,893 = $37,893

Packing and 7,000 + 5,223 = $12,223 Shipping

RC1 RC2

Fabrication 22,099 (40,884 x 10,000) 18,500

18,785 (40,884 x 8,500 ) 18,500

Assembly 26,525 (37,893 x 21,000) 30,000

11,368 (37,893 x 9,000 ) 30,000

Packing and Shipping

6,519 (12,223 x 4,000 ) 7,500

5,704 (12,223 x 3,500 ) 7,500

Fixed cost $55,143 $35,857

iii. Distribute the total overhead amounts for activities to the two products in proportion to direct labor in that activity.

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LIMITATIONS• Lack of information about how to estimate the figures

Example 1: In the Exhibit 2 (Estimated Direct Labor

Per Month by Activity and by Product)

Example 2: The supplies expenses per unit (RC1-

$1.37 per unit & RC2-$1.46 per unit)

RECOMMENDATIONS

Traditional costing VS Activity-Based Costing

We recommended:Activity-based costing (ABC) It assigns manufacturing overhead costs to

products in a more logical manner than the traditional approach.

It identifies high overhead cost per unit. Thus, measure profitability with high accuracy.

Thank YouQ & A Session