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Madison Electric Pump Corporation manufactures electric pumps for commercial use. The company produces three models designated as regular advanced and deluxe The company uses a job-order cost

Madison Electric Pump Corporation manufactures electric pumps for commercial use. The company produces three models, designated as regular, advanced, and deluxe. The company uses a job-order cost accounting system with manufacturing overhead applied on the basis of direct-labor hours. The system has been in place with little change for 25 years. Product costs and annual sales data are as follows:  For the past 10 years, the company’s pricing formula has been to set each product’s target price at 110 percent of its full product cost. Recently, however, the regular-model pump has come under increasing price pressure from offshore competitors. The result was that the price on the regular model has been lowered to $220. The company president recently asked the controller, “Why can’t we compete with these other companies? They’re selling pumps just like our regular model for $212. That’s only two bucks more than our production cost. Are we really that inefficient? What gives?” The controller responded by saying, “I think this is due to an outmoded product-costing system. As you may remember, I raised a red flag about our system when I came on board last year. But the decision was to keep our current system in place. In my judgment, our product-costing system is distorting our product costs. Let me run a few numbers to demonstrate what I mean.” Getting the president’s go-ahead, the controller compiled the basic data needed to implement an activity-based costing system.

Jun 19 2020 View more View Less

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