￼￼ACCT204 Management Accounting Semester 1, 2018
Week 8 Workshop Activities
Chapter 8 8.2, E8.23, E8.25, E8.28, E8.30, P8.35.
￼8.2 What problems can arise with using a volume-based costing system in a modern manufacturing environment? E8.23 Activity-based costing: service firm
Brian Jones, the manager of Walkabout Tours, uses activity-based costing to calculate the cost of the company’s adventure walking trips. The company offers two basic trips: a two-day walk along the El Questro Gorge and a five-day trip to the Flinders Ranges. The activities and costs relevant to the walking trips are as follows:
Obtain national park permit Use equipment
No. of trips Destination
No. of person-days No. of people
No. of person-days Distance walked
Cost per unit of activity driver
$75 per trip
$150 per group permit issued $30 per person per day
$7.50 per person
$37.50 per person per day $10.50 per kilometre
The El Questro Gorge trip caters for 8 people, does not enter national parks and covers a walking distance of 50 kilometres. The Flinders Ranges trip caters for 15 people, is based in the Mt Remarkable National Park and covers 100 kilometres.
1. Calculate the total cost of each trip, the cost per person for each trip, and the cost per day for each trip, using the activity-based costing system.
2. Before introducing activity-based costing, Brian had estimated the average cost of all trips at $97.50 per person per day. (This was based on the previous year’s costs, adjusted for any expected changes.) Explain how the activity-based system results in more accurate service cost estimates.
Week 8 Workshop Activities 1
E8.25 Activity costs and activity drivers: manufacturer
Puresound Ltd manufactures MP3 players in its Brisbane plant. The following costs are budgeted for March.
Raw materials and components Insurance, plant
Electricity, machinery Electricity, light
Engineering design Depreciation, plant Depreciation, machinery Security wages, plant Equipment maintenance, wages Equipment maintenance, parts Setup wages
Inspection of finished goods Property taxes
Natural gas, heating
$4 425 000 900 000 180 000
1 050 000 2 100 000 60 000 225 000 45 000
45 000 180 000 45 000
￼￼ACCT204 Management Accounting Semester 1
1. Assign the costs to the materials-related, machinery-related, setup, inspection, engineering and facility- sustaining activities and calculate the total cost of each activity.
2. Identify an activity driver suitable for assigning each activity’s costs to products.
E8.28 Activity-based costing; quality control costs: manufacturer
Stylish Manchester Ltd has used a traditional cost accounting system to apply quality control costs uniformly to all products at a rate of 16 per cent of direct labour cost. Monthly direct labour cost for the satin sheet range is $147 000. In an attempt to distribute quality control costs more equitably, Stylish Manchester is considering activity-based costing. The following data relates to monthly quality control costs for its satin sheet range:
Activity Activity driver
Incoming material inspection Type of material
In-process inspection Number of units
Product certification Number of orders $216 per order
Cost per unit of activity driver Quantity of activity driver
$34.50 per type $0.42 per unit
35 000 units 50 orders
1. Calculate the monthly quality control cost to be assigned to the satin sheet product line under each of the following approaches:
1. (a) traditional system that assigns overhead on the basis of direct labour costs
2. (b) activity-based costing.
2. Does the traditional product costing system overcost or undercost the satin sheet product line with
respect to quality control costs? By what amount and why?
ACCT204 Management Accounting Semester 1
Week 8 Workshop Activities 2
E8.30 Comparison of activity-based and traditional product costs: manufacturer LO 8.6
Paris Fashions Ltd has switched from a traditional product costing system to an activity-based product costing system to assign manufacturing overhead costs to products. The table below shows the cost per unit of two products from its winter range under the two costing systems:
Costing system Sweater Overcoat
Traditional $39 $28 ABC $33 $50
1. Describe the most likely features of Paris Fashions’ sweater and overcoat products by replacing the question marks in the following table with ‘Yes’ or ‘No’.
Product feature Sweater Overcoat
High-volume product line ? ? Low-volume product line ? ? Produced in small batches ? ? Produced in large batches ? ? Simple to produce ? ? Complex to produce ? ?
2. Explain your answers to requirement 1.
￼Week 8 Workshop Activities 3
P8.35 Traditional and activity-based product costing: manufacturer
Pristine Ltd manufactures two types of storage cabinets, deluxe and executive, and applies manufacturing overhead to all units at the rate of $120 per machine hour. Production information follows.
Direct material cost $52.50 $90.00 Direct labour cost 30.00 30.00 Budgeted volume (units) 8 000 15 000
The management accountant has determined that the firm’s overhead can be identified with three activities: manufacturing setups, machine processing and product shipping. Data on the number of setups, machine hours and outgoing shipments, which are the activities’ three respective cost drivers, follow:
Deluxe Executive Total
Setups 50 30 Machine hours 16 000 22 500 Outgoing shipments 100 75
38 500 175
The firm’s total overhead of $4 620 000 is subdivided as follows: manufacturing setups, $1 008 000; machine processing, $2 772 000; and product shipping, $840 000.
1. Calculate the unit manufacturing cost of deluxe and executive cabinets by using the company’s current overhead costing procedures.
2. Calculate the unit manufacturing cost of deluxe and executive cabinets by using activity-based costing.
3. Calculate the aggregate amount by which the deluxe cabinet line is undercosted/overcosted by the
company’s current traditional overhead costing procedures. Then calculate the aggregate amount by
which the traditional system undercosts/overcosts the executive cabinet line.
4. Assume that the current selling price of a deluxe cabinet is $390 and the marketing manager is
contemplating a $45 discount to stimulate sales. Is this discount advisable? Briefly discuss.
￼￼ACCT204 Management Accounting Semester 1 Week 8 Workshop Activities 4