Identify Two Reasons Why an Activity-Based Costing System May Be Appropriate for Wall DĂ©cor
Identify two reasons why an activity-based costing system may be appropriate for Wall DĂ©cor.
Activity-based costing (ABC) is beneficial because costs are assigned more directly on the basis of the cost drivers used to produce each product, leading to more inaccurate product costing. The unfinished prints and framed prints were priced improperly in the Wall DĂ©cor Company.
Another indication that activity-based costing would be beneficial because companies using the ABC system can trace many overhead costs directly to activities, leading to a more enhanced control over the costs of overhead. The technology section of the Wall DĂ©cor Company had the highest overhead costs and included two out of the four activities occurring, which were website optimization and framing and matting. The activity-based overhead rates can be calculated by dividing the estimated overhead associated with each activity by the expected use of the cost driver.
Case 4
Calculate the net present value using the numbers provided. Assume that annual cash flows occur at the end of the year.
Cost of equipment (zero residual value)
$800,000
Cost of ink and paper supplies (purchased immediately
100,000
Annual cash flow savings for Wall DĂ©cor
175,000
Annual additional store cash flow from increased sales
100,000
Sale of ink and paper supplies at end of 5 years
50,000
Net present value
$119,686
COMPUTATIONS:
Cost of Equipment
800,000 x 1.00000
(800,000)
Cost of ink and paper supplies
100,000 x 1.00000
(100,000)