Identify Two Reasons Why an Activity-Based Costing System May Be Appropriate for Wall Décor

Identify two reasons why an activity-based costing system may be appropriate for Wall Décor.

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 Décor 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 Décor 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 Décor 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)