Introduction to management accounting tutorial work week 5 PDF

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Introduction to management accounting tutorial work / exercise material - week 5...

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INTRODUCTION TO MANAGEMENT ACCOUNTING ACC60204 TUTORIAL 5 ACTIVITY BASED COSTING QUESTION 1 Rustafson Corporation is a diversified manufacturer of consumer goods. The company’s activity based costing system has the following seven activity cost pool: Activity cost pool Labor related Machine related Machine setups Production orders Product testing Packaging General factory

Estimated overhead cost £52,000 £15,000 £42,000 £18,000 £48,000 £75,000 £108,800

Expected activity 8,000 direct labor-hours 20,000 machine-hours 1,000 setups 500 orders 2,000 tests 5,000 packages 8,000 direct labor-hours

Required: 1. 2.

Compute the activity rate for each activity cost pool. Compute the company’s predetermined overhead rate, assuming that the company uses a single plantwide predetermined overhead rate based on direct labor hour.

QUESTION 2 Larner Corporation is a diversified manufacturer of industrial goods. The company’s activity based costing system has the following six activity cost pools and activity rates: Activity cost pool Labor related Machine related Machine setups Production orders Shipments General factory

Activity rates £7.00 per direct labor hour £3.00 per machine hour £40.00 per setup £160.00 per order £120.00 per shipment £4.00 per direct labor hour.

Cost and activity data have been supplied to the following products: Shipments General factory

10 1000

1 40

Required: Compute the unit product cost of each of the products listed above. QUESTION 3 Gilmarsh is a large partnership of architects which currently operates an absorption costing but is experimenting with an ABC system. The current annual budget shows the following:

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$000 Sales revenue Direct labor Overhead costs

$000 3,120

1,600 800 2,400 720

Operating income

The architects absorb overhead as a percentage of the total cost of direct labor and their standard profit margin is 30% of total cost. As part of their investigation into ABC, they wish to compare the two systems on a recently completed set of plans for a leisure centre. The cost of direct labor used on this job is $10,000. Their experimental ABC system is based on the following annual analysis: Activity Clerical support Information systems General management Printing and photocopying Telephone Total

Cost driver Clerical hours Computer hours Management hours Number of drawings Telephone calls

Annual cost pool ($) 130,000 300,000 50,000 250,000 70,000 800,000

Annual used of cost drivers 26,000 hours 2,000 hours 5,000 hours 500,000 pages 35,000 calls

The leisure centre contract caused the following activities to happen: Activity Clerical support Information systems General management Printing and photocopying Telephone

Cost driver Clerical hours Computer hours Management hours Number of drawings Telephone calls

Use of cost driver 400 hours 30 hours 40 hours 3,500 pages 300 calls

You are required to: a. Calculate the absorption cost b. Calculate the activity-based cost c. Compare your findings and comment on them.

QUESTION 4 For many years, Thomas Company manufactured a single product called a LEC40. Then three years ago, the company automated a portion of its plant and at the same time introduced a second product called a LEC90 that has become increasingly popular. The LEC90 is a more complex product, requiring 0.80 hour of direct labor time per unit to manufacture and extensive machining in the

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automated portion of the plant. The LEC40 requires only 0.40 hour of direct labor time per unit and only a small amount of machining. Manufacturing overhead costs are currently assigned to products on the basis of direct labor hours. Despite the growing popularity of the company’s new LEC90, profit has been declining steadily. Management is beginning to believe that there may be a problem with the company’s costing system. Material and labor costs per unit are as follows:

Direct material Direct labor (0.40 hour and 0.80 hour @ £15.00 per hour)

LEC40 £30.00 £6.00

LEC90 £50.00 £12.00

Management estimates that the company will incur £912,000 in manufacturing overhead costs during the current year and 60,000 units of the LEC40 and 20,000 units of the LEC90 will be produced and sold. Required: a. Compute the predetermined manufacturing overhead rate assuming that the company continues to apply manufacturing overhead cost on the basis of direct labor hour. Using this rate and other data from the problem, determine the unit product cost for each product. b. Management is considering using activity based costing to apply manufacturing overhead cost to products for external financing reports. The activity based costing system would have the following four activity cost pools: Activity cost pool Maintaining parts inventory Processing purchase orders Quality control Machine related

Activity measure Number of part types Number of purchase order Number of test run Machine hours

Activity measure Number of part types Number of purchase orders Number of tests run Machine hours

Estimated overhead cost £225,000 £182,000 £45,000 £460,000

Expected activity LEC40 LEC90 Total 600 900 1,500 2,000 800 2,800 500 1,750 2,250 1,600 8,400 10,000

Determine the activity rate (i.e. predetermined overhead rate) for each of the four activity cost pools.

c. Using the activity rate you computed in (b) above, do the following: i.

Compute the total amount of manufacturing overhead cost that would be applied to each product using the activity based costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit of each product.

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ii. Compute the unit product cost of each product.

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