Week 8 Workshop Activities 1 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: Activity Activity driver Cost per unit of activity driver Advertise trips No. of trips $75 per trip Obtain national park permit Destination $150 per group permit issued Use equipment No. of person-days $30 per person per day Insure participants No. of people $7.50 per person Cook meals No. of person-days $37.50 per person per day Guide walkers Distance walked $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. Required: 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.)ACCT204 Management Accounting
Explain how the activity-based system results in more accurate service cost estimates. Week 8 Workshop Activities 2 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 $4 425 000 Insurance, plant 900 000 Electricity, machinery 180 000 Electricity, light 90 000 Engineering design 915 000 Depreciation, plant 1 050 000 Depreciation, machinery 2 100 000 Security wages, plant 60 000 Equipment maintenance, wages 225 000 Equipment maintenance, parts 45 000 Setup wages 60 000 Inspection of finished goods 45 000 Property taxes 180 000 Natural gas, heating 45 000 Required: 1. Assign the costs to the materials-related, machinery-related, setup, inspection, engineering and facilitysustaining activities and calculate the total cost of each activity. 2. Identify an activity driver suitable for assigning each activity’s costs to products.ACCT204 Management Accounting
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 Cost per unit of activity driver Quantity of activity driver Incoming material inspection Type of material $34.50 per type 24 types In-process inspection Number of units $0.42 per unit 35 000 units Product certification Number of orders $216 per order 50 orders Required: 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 Week 8 Workshop Activities 3
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 Required: 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 4 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. Deluxe Executive 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.ACCT204 Management Accounting
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 80 Machine hours 16 000 22 500 38 500 Outgoing shipments 100 75 175 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. Required: 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.