Activity Based Costing (ABC) Questions
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:
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:
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:
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:
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:
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
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 drivers | Budgeted Level For Cost Drivers |
---|---|---|---|
Machine Set-up | 20,000,000 | Number of set-ups | 100 |
Material handling | 10,000,000 | Weight of Raw materials | 50,000 kgs |
Hazardous waste control | 5,000,000 | Weight of Hazardous chemicals used | 10,000 kgs |
Quality Control | 7,500,000 | Number of inspections | 1,000 |
Other overhead costs | 20,000,000 | Machine hours | 20,000 |
An order for 100 boxes of film development chemicals has the following production requirements.
Required