Accounting for Non-current Assets
QUESTION ONEA firm purchased on 1st January, 2000 certain Machinery for shs. 5,820,000/= and spent Shs. 180,000/= on its erection.
On 1st July, 2000 additional machinery costing shs. 2,000,000/= was purchased.
On 1st July, 2002
the machinery purchased on 1st January, 2000 having become absolute was auctioned for shs. 2,860,000/= and on the same date fresh
machinery was purchased at a cost of shs. 4,000,000/=
Depreciation was provided for annually on 31st December at the rate of 10% on written down value. In 2003, however the firm changed this method of providing depreciation and adopted the method of providing 5% per annum depreciation on original cost of the machinery
Required : Give the Machinery account as it would stand at the end of each year from 2000 to 2003
QUESTION TWOMapunda 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 | Machine 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:
QUESTION THREEJOSH 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:
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: