CONTACT HOURS FOR CALLS WEDNESDAYS AND THURSDAYS, 6PM TO 7PM. Production and sales volumes (units) 30,000 50,000. Raw material usage (kg) per unit 4 6

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1 MAAGEMET IFORMATIO - COST ACCOUTIG ASPECT WEEK 6 QUESTIOS COTACT UMBER COTACT HOURS FOR CALLS WEDESDAYS AD THURSDAYS, 6PM TO 7PM TOPIC: ACTIVITY BASE COSTIG VIDEO LECTURE CHEPTER: 12 QUESTIO 1 (Compulsory) Phelim Co. produces two products, X and Y, both made from the same material. Until now, it has used traditional absorption costing to allocate overheads to its products. The company is now considering an activity based costing system. Information for the two products for the last year is as follows: X Y Production and sales volumes (units) 30,000 50,000 Selling price per unit Raw material usage (kg) per unit 4 6 Direct labour hours per unit Machine hours per unit umber of production set ups per annum umber of purchase orders per annum umber of deliveries to retailers per annum The price for raw materials remained constant throughout the year at 2 per kg. Similarly, the direct labour cost for the whole workforce was 15 per hour. The annual overhead costs were as follows: Machine set up costs 30,000 Machine running costs 40,000 Ordering costs 45,000 Delivery costs 45,000 Total Overhead cost 160,000 Page 1

2 Required: (a) Calculate the full cost and profit per unit for products X and Y under traditional absorption costing, using direct labour hours as the basis for absorption. 6 Marks (b) Calculate the full cost and profit per unit for each product using activity based costing. 10 Marks (c) Advise Phelim Co. on four benefits that may arise resulting from his business having a good employee evaluation process in place. 4 Marks Total: 20 Marks Page 2

3 QUESTIO 2 (Compulsory) LUD Ltd presently uses a traditional pre-determined overhead absorption rate for allocating production overhead to its products based on direct labour hours. Total production overhead cost is 1,225,000 and it has been determined that four major activities contribute towards this cost as follows: Set Up 428,750 Stores 367,500 Production Control 245,000 Quality Control 183,750 Total 1,225,000 The company is investigating the use of activity based costing and has ascertained the following production information in relation to its range of products: Product A Product B Product C Total o. of units produced 2,000 50,000 10,000 62,000 Direct Labour Hours used 10, ,000 25, ,000 o. of Set Ups Inspections Production Orders Stock requisitions Requirement:- (a) Prepare a schedule showing the production overhead charged to Products A, B and C per unit using the pre-determined overhead absorption rate used by LUD Ltd, based on traditional costing methods. 5 Marks (b) Identify cost drivers, calculate activity based overhead absorption rates for LUD Ltd, and show the revised production overhead charged to products A,B and C per unit. 8 Marks (c) Briefly explain which set of calculations is most accurate. 3 Marks (d) LUD Ltd has received a special order for a batch of 2,000 modified units of Product C. In addition to normal production overheads, it is anticipated that this job will require materials estimated at 2,400 (requiring 3 stock requisitions) and 500 hours of labour at per hour. Calculate the prime cost per unit of the special order, using the activity based cost information. 4 Marks Total 20 Marks Page 3

4 QUESTIO 3 Dunning Limited has recently introduced at Activity Based Costing System and has provided the following details for the month of January:- Cost Pool Overhead Cost Parts 10,000 Maintenance 18,000 Stores 10,000 Administration 2,000 You have ascertained the following activity information:- umber of employees 40 Total number of parts 500 umber of materials requisitions 20 Maintenance hours 600 During the month, 500 units of Product Y were produced. This production run required 100 parts and 150 maintenance hours; 5 material requisitions were made and 10 employees worked on the units. Requirement (a) Using Activity Based Costing, calculate the total amount of overhead absorbed by each unit of Product Y. 10 Marks (b) Discuss THREE different types of controls and explain how activity based costing assists in the control of costs? 10 Marks Total 20 Marks Page 4

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