Question: 23

Sumantra Technology Ltd.,. 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. Sumantra plans to sell 65,000 of the TV boards in 2001 at a price of Rs.150 per unit. The second high-volume product, a personal computer circuit board, is a recent addition to Sumantra's product line. Because the PC board incorporates the latest technology it can be sold at a premium price. The 2001 plans include the sale of 40,000 PC boards at Rs.300 per unit.

Sumantra's management group is meeting to discuss how to spend the sales and promotion Rupees for 2001. The sales manager believes that the market share for the TV board could be expanded by concentrating Sumantra'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 the PC board is more than double the contribution from the 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.

Variable manufacturing overhead is applied on the basis of direct-labor hours. For 2001, variable overheadis budgeted at Rs.11,20,000, and direct-labor hours are estimated at 2,80,000. The hourly rates for machine time and direct labor are Rs.10 and Rs.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 2001 expenditures for direct material are budgeted at Rs.1,06,00,000.

Andrew Fulton, Sumantra's controller, believes that before the management group proceeds with the discussion about allocating sales and promotional Rupees to individual products, it might be worth while 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."

Required:

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

(2) On the basis of Sumantra's unit cost data given in the problem, calculate the total contribution margin expected in 2001 for the PC board and the TV board.

(3) On the basis of an activity-based costing system, calculate the total contribution margin expected in 2001 for the PC board and the TV board.

(4) Explain how a comparison of the results of the two costing methods may impact the decisions made by Sumantra's management group.