Activity-Based Costing; Customer Group Cost Analysis Franklin Furniture Inc. (FFI) manufactures bedroom furniture in sets (a set includes a dresser, two queen-size beds, and one bedsidetable) for use in motels and hotels. FFI has three customer groups, which it calls the value, quality,and luxury groups. The value products are targeted to low-price motels that are looking for simplefurniture, while the luxury furniture is targeted to the very best hotels. The value line is attractive toa variety of hotels and motels that appreciate the combination of quality and value. Currently therehas been a small increase in the quality and value lines, and an appreciable increase in demand in theluxury line, reflecting cyclical changes in the marketplace. Luxury hotels are now in more demandfor business travel, while a few years ago, the value segment was the most popular for business travelers. FFI wants to be able to respond to the increased demand with increased production but worriesabout the increased production cost and about price setting as its mix of customers and productionchange. FFI has used a volume-based overhead allocation rate based on direct labor hours for sometime. Direct labor cost is $15 per hour.Budgeted Cost Cost DriverMaterials handling $ 349,600 Number of partsProduct scheduling 160,000 Number of production ordersSetup labor 216,000 Number of setupsAutomated machinery 1,750,000 Machine hoursFinishing 619,500 Direct labor hoursPack and ship 290,400 Number of orders shipped$3,385,500General, selling, and adm. costs $5,000,000The budgeted production data for the three product lines follow.Product Lines Value Quality LuxurySets produced 15,000 5,000 600Price $650 $900 $1,200Direct materials cost per set $80 $50 $110Number of parts per set 30 50 120Direct labor hours per set 4 5 7Machine hours per set 3 7 15Production orders 50 70 200Production setups 20 50 50Orders shipped 1,000 2,000 300Number of inspections 2 6 14Required (Round all activity rates and unit costs to two decimal places)1. Determine the cost per set and the total production cost of each of the three customer groups usingactivity-based costing.2. Determine the production cost for each of the three customer groups using FFI’s current volume-basedapproach.3. Compare the two approaches and discuss the strategic and competitive issues of using each of the twomethods.
Activity-Based Costing; Customer Group Cost Analysis Franklin Furniture Inc. (FFI) manufactures bedroom furniture in sets (a set includes a dresser, two queen-size beds, and one bedside
table) for use in motels and hotels. FFI has three customer groups, which it calls the value, quality,
and luxury groups. The value products are targeted to low-price motels that are looking for simple
furniture, while the luxury furniture is targeted to the very best hotels. The value line is attractive to
a variety of hotels and motels that appreciate the combination of quality and value. Currently there
has been a small increase in the quality and value lines, and an appreciable increase in demand in the
luxury line, reflecting cyclical changes in the marketplace. Luxury hotels are now in more demand
for business travel, while a few years ago, the value segment was the most popular for business travelers. FFI wants to be able to respond to the increased demand with increased production but worries
about the increased production cost and about price setting as its mix of customers and production
change. FFI has used a volume-based overhead allocation rate based on direct labor hours for some
time. Direct labor cost is $15 per hour.
Budgeted Cost Cost Driver
Materials handling $ 349,600 Number of parts
Product scheduling 160,000 Number of production orders
Setup labor 216,000 Number of setups
Automated machinery 1,750,000 Machine hours
Finishing 619,500 Direct labor hours
Pack and ship 290,400 Number of orders shipped
$3,385,500
General, selling, and adm. costs $5,000,000
The budgeted production data for the three product lines follow.
Product Lines Value Quality Luxury
Sets produced 15,000 5,000 600
Price $650 $900 $1,200
Direct materials cost per set $80 $50 $110
Number of parts per set 30 50 120
Direct labor hours per set 4 5 7
Machine hours per set 3 7 15
Production orders 50 70 200
Production setups 20 50 50
Orders shipped 1,000 2,000 300
Number of inspections 2 6 14
Required (Round all activity rates and unit costs to two decimal places)
1. Determine the cost per set and the total production cost of each of the three customer groups using
activity-based costing.
2. Determine the production cost for each of the three customer groups using FFI’s current volume-based
approach.
3. Compare the two approaches and discuss the strategic and competitive issues of using each of the two
methods.
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