QUESTION ONE

Swagg Jewelry Corporation manufactures custom jewelry. In the past, Swagg has been using a traditional overhead allocation system based solely on direct labour hours. Sensing that this system was distorting costs and selling prices, Swagg has decided to switch to an activity-based costing system using three activity cost pools. Information on these activity cost pools are as follows:

Activity cost pool Activity Measure Estimated Activity Estimated overhead cost (TZS)
Labour related Direct labour-hours 8,000 40,000,000
Machine related Machine hours 12,500 50,000,000
Quality controls Number of inspections 800 12,000,000

Job #309 incurred TZS 900,000 of direct material, 30 hours of direct labour at 40,000 per hour, 80 machine hours, and 5 inspections.

Required:

  1. What is the cost of the job under the activity-based costing system?
  2. Relative to the activity-based costing system, would Job #309 have been overcosted or undercosted under the traditional system and by how much?

  • Updated: 02 Jul 24
  • |
  • Attempts: 552
  • |
  • Correct: 229

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Prime cost:
QUESTION TWO

Mapunda Ltd manufactures four products, A, B, C and D using the same plant and processes. The following information relates to a production period.

Product Volume Material cost per unit (TZS) Direct labour per unit Machine time per unit Labour cost per unit (TZS)
A 500 5,000 ½ hour ¼ hour 3,000
B 5,000 5,000 ½ hour ¼ hour 3,000
C 600 16,000 2 hour 1 hour 12,000
D 7,000 17,000 1½ hour 1½ hour 9,000

Total production overhead recorded by the cost accounting system is analysed under the following headings:

Factory overhead applicable to machine-oriented activity 37,424,000
Set-up cost 4,355,000
Cost of ordering materials 1,920,000
Material handling 7,580,000
Administration of spare parts 8,600,000

These overheads are absorbed by products on a machine hour rate of TZS 4,800 per hour, giving an overhead cost per product of:

A: TZS 1,200, B: TZS 1,200, C: TZS 4,800, and D: TZS 7,200

However, investigation into the production overhead activities for the period reveals the following totals:

Product Number of set-ups Number of material orders Number of times materials are handled Number of spare parts
A 1 1 2 2
B 6 4 10 5
C 2 1 3 1
D 8 4 12 4

Required:

  1. Compute overhead cost per unit using ABC, tracing overheads to production units by means of cost drivers
  2. Comment briefly on the differences disclosed between OH traced by the present system and those traced by ABC

  • Updated: 02 Jul 24
  • |
  • Attempts: 192
  • |
  • Correct: 44

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Product A's Overhead cost @ unit:
QUESTION THREE

JOSH Ltd assembles three types of motorcycle at the same factory: the 50cc Sunshine; the 250cc Roadster and the 1000cc Fireball. It sells the motorcycles throughout the world. In response to market pressures JOSH Ltd has invested heavily in new manufacturing technology in recent years and, as a result, has significantly reduced the size of its workforce.

Historically, the company has allocated all overhead costs using total direct labour hours, but is now considering introducing Activity Based Costing (ABC).

JOSH Ltd's accountant has produced the following analysis.

Annual Output (Units) Annual Direct Labour Hours Selling price (TZS '000 per unit) Raw material cost (TZS '000 per unit)
Sunshine 2,000 200,000 4,000 400
Roadster 1,600 220,000 6,000 600
Fireball 400 80,000 8,000 900

The three cost drivers that generate overheads are:

  • Deliveries to retailers – the number of deliveries of motorcycles to retail showrooms
  • Set-ups – the number of times the assembly line process is re-set to accommodate a production run of a different type of motorcycle
  • Purchase orders – the number of purchase orders.

The annual cost driver volumes relating to each activity and for each type of motorcycle are as follows:

number of deliveries to retailers Number of set-ups Number of purchase orders
Sunshine 100 35 400
Roadster 80 40 300
Fireball 70 25 100

The annual overhead costs relating to these activities are as follows:

TZS '000
Deliveries to retailers 2,400,000
Set-up costs 6,000,000
Purchase orders 3,600,000

All direct labour is paid at TZS 5,000 per hour. The company holds no stocks.

At a board meeting there was some concern over the introduction of activity based costing.

The finance director argued: "I very much doubt whether selling the Fireball is viable but I am not convinced that activity based costing would tell us any more than the use of labour hours in assessing the viability of each product."

The marketing director argued: "I am in the process of negotiating a major new contract with a motorcycle rental company for the Sunshine model. For such a big order they will not pay our normal prices but we need to at least cover our incremental costs. I am not convinced that activity based costing would achieve this as it merely averages costs for our entire production"

The managing director argued: "I believe that activity based costing would be an improvement but it still has its problems. For instance if we carry out an activity many times surely we get better at it and costs fall rather than remain constant. Similarly, some costs are fixed and do not vary either with labour hours or any other cost driver."

The chairman argued: 'I cannot see the problem. The overall profit for the company is the same no matter which method of allocating overheads we use. It seems to make no difference to me.'

Required:

Calculate the total profit on each of JOSH Ltd‘s three types of product using each of the following methods to attribute overheads:

  1. The existing method based upon labour hours; and
  2. Activity based costing.

  • Updated: 02 Jul 24
  • |
  • Attempts: 108
  • |
  • Correct: 48

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Sunshine profit using Traditional method:
QUESTION FOUR

Jingle Publishing Co publishes two forms of book.

The company publishes a children's book (CB), which is sold in large quantities to government-controlled schools. The book is produced in four large production runs. The second book is a comprehensive technical journal (TJ). It is produced in monthly production runs, 12 times a year. The directors are concerned about the performance of the two books and are wondering what the impact would be of a switch to an activity-based costing (ABC) approach to accounting for overheads. They currently use absorption costing, based on number of books produced for all overhead calculations. Overheads amount to T.shs 2,880,000. The CB will be inspected on 180 occasions next year, whereas the TJ will be inspected just 20 times.

Machine time per unit is 6 minutes for the CB and 10 minutes for the TJ.

Jingle Publishing will produce its annual output of 1,000,000 CBs in four production runs and approximately 10,000 TJs per month in each of 12 production runs.
Required:

  1. Calculate the overhead cost per unit of the CB using the current system of absorption costing.
  2. The overheads involved have been analyzed as follows:
Overhead T.shs Activity driver
Production costs 2,160,000 Machine hours
Quality control 668,000 Number of inspections
Production set up costs 52,000 Number of production runs
2,880,000

Required:
Calculate the ABC allocated total overheads to CB


  • Updated: 02 Jul 24
  • |
  • Attempts: 127
  • |
  • Correct: 51

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CB Overhead cost per unit using Traditional method:
QUESTION FIVE

The management of Back 2 Back photographic company has established the following activity cost pools and cost drivers.

Activity
Cost Pool
Budgeted
Overhead Cost
T.shs
Cost driversBudgeted Level
For Cost Drivers
Machine Set-up 20,000,000Number of
set-ups
100
Material
handling
10,000,000Weight of
Raw materials
50,000 kgs
Hazardous
waste control
5,000,000Weight of Hazardous
chemicals used
10,000 kgs
Quality Control7,500,000Number of
inspections
1,000
Other overhead
costs
20,000,000Machine hours20,000

An order for 100 boxes of film development chemicals has the following production requirements.

  • Machine set-ups        4 set-ups
  • Raw Materials         10,000 kgs
  • Hazardous Materials    2,000 kgs
  • Inspections          10 inspections
  • Machine hours       500 machine hours

Required

  1. Compute the total overhead that should be assigned to development chemical order, using the Activity-Based Costing system.
  2. What is the overhead cost per box of chemicals?
  3. Using the abve information, assume that in the 100 boxes order, there are 50 boxes of type Ax and 50 boxes of type Bx. Type Ax boxes requires twice as much inspections compared to type Bx boxes. Total number of inspections required for 100 boxes is 12. What will be the cost per box (Overhead cost) for type Ax and Bx boxes?

  • Updated: 02 Jul 24
  • |
  • Attempts: 63
  • |
  • Correct: 25

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OAR of Machine setup:
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