Brilliant Accents Company manufactures and sells two styles of kitchen taps: Brass and Chrome. The Brass has been produced since 2004 and sells for $22.50, and the Chrome, a newer model introduced in early 2009 that sells for $28.50. Based on the following income statement for the year ended November 30, 2011, senior management at Brilliant Accents have decided to concentrate its marketing resources on the Chrome model and to begin to phase out the Brass model.
Brilliant Accent's controller, James Nader, is advocating the use of activity-based costing and has gathered the following information about the company's manufacturing overhead costs for the year ended November 30, 2011.
After completing the analysis, Nader shows his results to Sandy Mason, the Brilliant Accents division president. Mason does not like what she sees. "If you show headquarters this analysis, they are going to ask us to phase out the Chrome line, which we have just introduced. This whole costing stuff has been a major problem for us. First Brass was not profitable and now Chrome." "Looking at the ABC analysis, I see two problems. First, we do many more activities than the ones you have listed. If you had included all activities, maybe your conclusions would be different. Second, you used number of setups and number of inspections as allocation bases. The number would be different had you used setup-hours and inspection-hours instead. I know that measurement problems precluded you from using these other cost-allocation bases, but I believe you ought to make some adjustments to our current numbers to compensate for these issues. I know you can do better. We can't afford to phase out either product."
Nader knows that the numbers are fairly accurate. As a quick check, he calculates the profitability of Chrome and Brass using more and different allocation bases. The set of activities and activity rates he had used resulted in numbers that closely approximate those based on more detailed analyses. He is confident that headquarters, knowing that Chrome was introduced only recently, will not ask Brilliant Accents to phase it out. He is also aware that a sizeable portion of Mason's bonus is based on division revenues. Phasing out either product would adversely affect her bonus. Still, he feels some pressure from Mason to do something.
Required
1. Describe the current costing system and list the potential weaknesses of this system regarding product costing accuracy and cost control.
2. Describe the proposed ABC system, the benefits from using it and why those benefits occur.
3. Using activity-based costing, calculate the unit cost, gross margin and gross margin percentage for both the Chrome and Brass models.
4. Discuss thoroughly whether Brilliant Accents Technology should discontinue production of the Brass model and concentrate on production of Chrome.
5. Comment on Mason's concerns about the accuracy and limitations of an ABC system.
6. Referring to the ethical dilemma in the case, what would you suggest James Nader should do in response to Mason's comments?