Management and Cost Accounting Assignment

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B313F Management and Cost Accounting

Assignment 1

Date due:29 October 2008
Weighting:15% of the total marks of the course

Question 1(25 marks)

Mini Case – Seto’s Storage Warehouse

Paul Seto owns and manages a commercial storage warehouse. He stores a vast variety of perishable goods for his customers. Under the existing pricing policy, he has charged customers using a flat rate of $2.40 per kilogram per month for goods stored. His storage warehouse has 10,000 cubic metres of storage capacity.

In the past two years, Seto has become dissatisfied with the profitability of the warehouse operation. Despite the fact that the warehouse remains relatively full, revenues have not kept pace with operating costs. Recently, Seto approached his accountant, Albert Lo, about using activity-based costing (ABC) to improve his understanding of the causes of costs and revise the pricing formula. Lo has determined that most costs can be associated with one of four activities. Those activities and their related monthly costs, volume measures, and volume levels for 2008 are as follows:

|Activity |Cost |Monthly Volume Measure | |Send/receive goods | $80,000 |Weight in kilograms – 50,000 | |Store goods | $8,000 |Volume in cubic metres – 800 | |Move goods | $10,000 |Volume in square metres – 500 | |Identify goods | $3,000 |Number of packages – 500 |

Lo has also collected last month’s information on the following 3 customers whose goods were all received on the first day of last month.

|Customers |Weight of Order |Cubic Metres |Square Metres |Number of Packages | | |(Kilograms) | | | | |Sunshine Co. |20,000 |600 |30 |10 | |Best Buy Co. |20,000 |400 |20 |40 | |Chow’s Trading |20,000 |200 | 100 | 160 |

Seto would like Lo to perform some analyses based on the above information and data in order to evaluate whether to use ABC.

Required:

a.Determine the price to be charged to each of the 3 customers under the existing pricing policy.(3 marks)

b.Based on the monthly activity cost and volume data provided, determine the amount of cost assigned to each of the 3 customers.(10 marks)

c.Determine the price to be charged to each of the 3 customers using activity-based costing (ABC), assuming Seto would base the price on the cost determined in part (b) plus a markup of 40 percent.(3 marks)

d. Critically discuss whether Seto’s existing pricing policy captures the costs incurred to provide the warehouse services.(5 marks)

e. A cost hierarchy categorizes costs into different cost pools on the basis of the different types of cost drivers or cost-allocation bases. Describe the four levels of a manufacturing cost hierarchy under the ABC system.(4 marks)

Question 2(25 marks)

Antique Furnishings Ltd. is a Yuen Long based manufacturer making three unique wood products: bed-frames, coffee tables, footstools. These products are completely carved by hand by skilled craftspeople who have been trained in making these products. Since it takes about a year to train each craftsperson, the labour cost is a fixed production constraint over the short term. For the year...
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