Case information Beginning of the year: January 1, 2025 TNE1, Inc., a clothing manufacturer, recently hired you as a management accountant in its T-Shirt division. TNE1’s T-Shirt division produces two products, a ‘basic’ T-shirt and an organic cotton ‘premium’ T-shirt. The basic T features double needle stitching and taped neck and shoulders and is made from 100% preshrunk cotton (6 oz weight). Basic screen printing is available for this T. The premium T features reinforced shoulder construction to maintain shape and is made from 100% certified super-soft organic cotton (4 oz weight). Various options are available to customize this T including digital printing and embroidering. For example, one premium T-shirt supplied to UNCG has an embroidered logo and ‘Somebody from UNCG loves you’ digitally printed in multiple colors. The premium line of T-shirts was recently introduced and TNE1 has been selling as many of this product as it can produce. Obviously senior management is very pleased with the premium T’s, however, production personnel are less enthusiastic because of the more complex manufacturing demands placed on them by this new product. In response to demands for more relevant costing information your predecessor introduced an ABC system. Two key production activities, manufacturing operations and machine setups, were identified. Production costs related to these activities are now assigned to the two T-shirt lines based on the cost drivers of machine-hours and setup labor-hours, respectively. The old product costing system allocated all manufacturing overhead based on direct manufacturing labor-hours. Your predecessor argued for a move to ABC because production runs for the premium T’s take longer to setup and allocating setup costs based on setup labor hours better represents resources consumed by the two T-shirt lines. The T-shirt division is growing in complexity and part of your job is to manage and explain the more advanced accounting information systems used within the division. Prior to the introduction of the premium T-shirt line TNE1 had been following a cost leadership strategy and had about a 10% share of the T-shirt market. This strategy was successful in the past, but with the recent challenging economic times management looked for ways to diversify its product range. After the introduction of the premium line TNE1 was having trouble maintaining the cost competitiveness of its basic line, and a number of key customers had defected. Although the premium line required more design changes, more complex materials management, significant equipment upgrades, and expediting of customized orders it was showing healthy margins and good demand. Some competitors were beginning to complain that TNE1 was pursuing predatory pricing practices even though TNE1 was pricing above its reported average variable costs. After settling into your make-shift office you decide to review the T-Shirt division’s existing costing and budgeting information. To your dismay you are told that the division’s records are in disarray and the 2025 budget has not been compiled. Since you are short on time, you decide to use the information from the last year’s (2024) records to do an initial examination of the division. These records include some budget estimates assembled before the start of 2024 and actual information for 2024. 2 $564,000 Manufacturing Operations Overhead Costs Variable costs Supplies Indirect manuf. Labor Power Maintenance Fixed costs Depreciation Supervision and Designer Salaries Power Maintenance $95,000 275,000 69,000 125,000 50,000 40,000 20,000 30,000 $140,000 $204,600 Machine Setup Overhead Costs Variable costs Supplies Indirect manuf. Labor Power Fixed costs Depreciation Supervision Power $50,000 90,000 64,600 80,000 225,000 130,000 $435,000 B. Actual information for 2024 that can be traced directly to each product: Basic T-shirts Premium T-shirts Direct material cost (DM Used) $1,176,000 $900,000 Feet of cotton per T-shirt 4 feet 4 feet Cotton in inventory (12/31/2024) 50,000 feet 30,000 feet Direct labor cost $756,000 $759,000 Direct labor hours per T-shirt 0.1 hour 0.23 hours Number of T-shirts per batch 750 150 Machine hours 10,920 hours 9,000 hours Number of batches 560 1,000 Setup labor hours per batch 4.5 7.5 Setup labor hours 2,520 7,500 Total sales commissions $246,000 $180,000 Units produced 420,000 150,000 Units sold 410,000 150,000 T-shirts in inventory (1/1/2024) 60,000 @ $6.00 each 0 Sales revenue $3,485,000 $3,000,000 A. Budget information assembled at the start of 2024 Basic T-shirts Premium T-shirts Budgeted production 400,000 120,000 Number of T-shirts per batch 500 200 Setup labor hours per batch 5.0 hours 7.0 hours Feet of cotton per T-shirt 4 feet 4 feet Direct labor hours per T-shirt 0.1 DLHrs 0.2 DLHrs Machine hours per T-shirt 0.025 MHrs 0.05 MHrs