ABC case study: Plum Electronics 20 marks (10% of final grade)
Plum Electronics, a division of Berry Corporation, manufactures two large-screen television
models: the Mammoth, which has been produced since 2009 and sells for $990, and the
Maximum, a newer model introduced in early 2011 that sells for $1,254. Based on the
following income statement for the year ended November 30, 2013, senior management at
Berry have decided to concentrate Plum’s marketing resources on the Maximum model and
to begin to phase out the Mammoth model because Maximum generates a much bigger
operating income per unit.
Plum Electronics Income Statement for the Fiscal Year Ended November 30, 2013
Revenues
Cost of goods sold

Mammoth

Maximum

Total

$21,780,000
13,794,000

$5,016,000
3,511,200

$26,796,000
17,305,200

7,986,000
6,413,000

1,504,800
1,075,800

9,490,800
7,488,800

$1,573,000

$429,000

$2,002,000

22,000
$71.50

4,000
$107.25

Gross margin
Selling and administrative expense
Operating income
Units produced and sold
Operating income per unit sold

Details for cost of goods sold for Mammoth and Maximum are as follows:
Mammoth

Maximum

Total

Per unit

Total

Per unit

Direct materials
Direct manufacturing labour a
Machine costs b

$5,033,600
435,600
3,484,800

$228.80
19.80
158.40

$2,569,600
184,800
316,800

$642.40
46.20
79.20

Total direct costs
Manufacturing overhead costs c

$8,954,000
$4,840,000

$407.00
$220.00

$3,071,200
$440,000

$767.80
$110.00

Total cost of goods sold

$13,794,000

$627.00

$3,511,200

$877.80

a

Mammoth requires 1.5 hours per unit and Maximum requires 3.5 hours per unit. The direct manufacturing labour cost is
$13.20 per hour.

b

Machine costs include lease costs of the machine, repairs, and maintenance. Mammoth requires 8 machine-hours per
unit and Maximum requires 4 machine-hours per unit. The machine-hour rate is $19.80 per hour.

c

Manufacturing overhead costs are allocated to products based on machine-hours at the rate of $27.50 per hour.

Plum’s controller, Steve Jacobs, is advocating the use of activity-based costing and activitybased management and has gathered the following information about the company’s
manufacturing overhead costs for the year ended November 30, 2013.

Units of the Cost-Allocation Base
Activity Centre (Cost-Allocation Base)
Soldering (number of solder points)
Shipments (number of shipments)
Quality control (number of inspections)

Total Activity Costs

Mammoth

Maximum

Total

$1,036,200
946,000
1,364,000

1,185,000
16,200
56,200

385,000
3,800
21,300

1,570,000
20,000
77,500

Purchase orders (number of orders)
Machine power (machine-hours)
Machine setups (number of setups)

1,045,440
63,360
825,000

Total manufacturing overhead

$5,280,000

80,100
176,000
16,000

109,980
16,000
14,000

190,080
192,000
30,000

After completing his analysis, Jacobs shows the results to Charles Clark, the Plum division
president. Clark does not like what he sees. “If you show headquarters this analysis, they
are going to ask us to phase out the Maximum line, which we have just introduced. This
whole costing stuff has been a major problem for us. First Mammoth was not profitable and
now Maximum. “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 numbers 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.” Jacobs knows that his numbers are fairly accurate. As a quick
check, he calculates the profitability of Maximum and Mammoth using more and different
allocation bases. The set of activities and activity rates he had used results in numbers that
closely approximate those based on more detailed analyses. He is confident that
headquarters, knowing that Maximum was introduced only recently, will not ask Plum to
phase it out. He is also aware that a sizable portion of Clark’s bonus is based on division
revenues. Phasing out either product would adversely affect his bonus. Still, he feels some
pressure from Clark to do something.
Questions:
1. What type of organization is Plum Electronics? Manufacturing, merchandising or
service? (1 mark)
2. What are their products? (1 mark)
3. What type of costing system are they currently using, what are the current cost
allocation bases used for indirect costs and what are the consequences for the
Maximum and Mammoth costs? (3 marks)
4. What is the costing issue currently facing the company? (3 marks)
5. What is the alternate costing system that is being proposed? Demonstrate the effect
of the alternate costing system on the unit costs of the Maximum and the Mammoth
using the example of calculations for allocating purchase order costs. (7 marks)
6. What are the advantages of the alternate costing system? (2 marks)
7. What is the potential ethical dilemma facing the management accountant in this
scenario? (1 mark)
(2 marks for presentation – correct grammar, correct spelling and appropriate
formatting)