Camelback

Communications, Inc.
Submitted by:

Charanjeet - PGP/23/260
Naveen - PGP/23/278
Kathiravan - PGP/23/286
Chakradhar - PGP/23/289
Tharun Kumar - PGP/23/302
 Introduction

The company, manufactured radio and television antenna under four different product lines, namely:
A.Rabbit ear antennas
B.Dipole antennas
C.Rotators for the dipole antennas line
D.FM and TV antenna
Cost Accounting system had to be changed as some products were found to be extremely profitable
while some were impossible to manufacture for a profit.
Culprit: Firm used single burden rate for all overhead costs.
 Burden rate calculation

 

Four-Product Costing model is used. Calculated the direct labour allocation rate that the existing single burden rate cost system would
generate assuming that each product sold a thousand units, the maximum that could be produced and that each direct labour hour cost $5.

 A mark-up of 40% on the standard cost produced the selling price

 Products were compared with the industry prices and discontinued all products whose mark-on was under 25%.

 Product A was discontinued as it had a mark-up of 15% and a revised cost allocation was to be estimated.
1. What will CCI now have to charge for each product to make a 40% mark-on? If CCI maintains its rule about
dropping products with a mark-on below 25%, which additional products, if any will it drop?
1. What will CCI now have to charge for each product to make a 40% mark-on? If CCI maintains its rule about
dropping products with a mark-on below 25%, which additional products, if any will it drop?

Product C has a mark-up profit of 6.11% and therefore it is

discontinued.
2. If you decide to drop additional products, recalculate the allocation rate per hour for the new product mix
(Repeat question 1)

New Allocation Rate

Variable Overhead 30000
Fixed Overhead 45000
Total Overhead 75000
Labour Hours 6000
Allocated Rate (Per Hours) 12.5

Product D has a mark-up profit of 22.50% and therefore it is

discontinued.
 3. What is going on?

The case gives the actual cost incurred during the production of the items A, B, C and D.

Camelback communications is calculating the allocation rate by adding together all the fixed and the variable cost for all the
products together and then dividing them by the total labour hours. Now this method of calculating the allocation rate is
incorrect because

• Fixed overhead per product is fixed irrespective of the labour hours

• Fixed overhead is being divided between the 4 products in a faulty way because of including it in the allocation rate.
• Also, the variable overhead that is calculated in this method is not correct because the variable overhead per unit is
different for different products

Consequences of this costing system are as follows:

Because of wrong allocation of costs, we find that certain products are gaining because the costs that should be truly attributed
to them are being given to other products and vice versa. Therefore the products whose costs are getting increased due to the
wrong allocation are showing less than desirable profits although there mark up is the same
4. What would happen if the firm kept its existing cost system but differentiated between variable and fixed cost
and decided to maximize contribution?

New Allocation Rate

Variable Overhead 35000
Total labour hours 12000
Allocated rate per hour 2.92

• We have allocated Variable OH based on

individual product labor hours.
• Fixed Cost is added later as a whole
• There is a wide gap between the old and this
new method
• All the products have more than 25%
contribution and hence no product is dropped.
5. What would happen if the firm modified its cost system so that all variable costs were traced to the product
accurately but fixed costs were allocated using the existing system?

If fixed costs are allocated using the current costing system and variable costs are correctly attributed then :
New Allocation Rate
Fixed Overhead 45000
Total labour hours 12000
Allocated rate per hour 3.75

• From the above, we can see that product A would be

discontinued even in this method of costing.
• There is very little change in the balancing of the costs
of the product.
• Also, it is clearly evident from this that the wrong
allocation of fixed costs has a much lesser
contribution in the deviation of the costs from their
true value as compared to variable costs.
6. Cost system modified with two cost pools

New Allocation Rate (A & B) New Allocation Rate (C & D)

Variable Overhead 22500 Variable Overhead 12500
Fixed Overhead 20000 Fixed Overhead 25000
Total Overhead 42500 Total Overhead 37500
Total Labour hours 7000 Total Labour hours 5000
Allocated per hour 6.07 Allocated per hour 7.50

The % mark-up of product A is less than 25%, so it is

discontinued.