cost accounting

Topics: Costs, Fixed cost, Variable cost Pages: 6 (909 words) Published: May 7, 2014
QUESTION 1: CHAPTER 7: ACTIVITY-BASED COSTING AND ACTIVITY-BASED MANAGEMENT Preston Piston manufactures two types of electric sleeping bags- Luxury and Exclusive- and applies manufacturing overhead to all units at the rate of $80 per machine hour. Production information follows:

Luxury
Exclusive
Direct material
$35
$60
Direct Labour
$20
$20
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:

Luxury
Exclusive
Setups
50
30
Machine hours
16,000
22,500
Outgoing shipments
100
75

The firm’s total overhead of $3,080,000 is subdivided as follows: manufacturing setups, $672,000; machine processing, $1,848,000; and product shipping, $560,000. REQUIRED:
a) Calculate the unit manufacturing cost of Luxury and Exclusive electric sleeping bags by using the company’s current overhead costing procedures. (3 marks)

Luxury
Exclusive
Direct Material
$                   35
$                  60
Direct Labour
$                   20
$                  20
Manufacturing Overhead cost
$                 160
$                120
Unit Manufacturing Cost
$           215.00
$          200.00
 Manufacturing overhead for luxury=16,000/8,000=2machine hour*80=$160  Manufacturing overhead for exclusive=22,500/15000=1.5machine hour*80=$120

B) Calculate the unit manufacturing cost of Luxury and Exclusive electric sleeping bags by using Activity-based costing.(5 marks)

luxury
Exclusive
Setups
$420,000
$252,000
Machine hours
$768,000
$1,080,000
Outgoing Shipments
$320,000
$240,000
Calculation:

Setups for luxury=50/80*672,000=$420,000/8000=$52.5 per unit Machine hours for luxury=16,000/38,500*1,848,000=$768,000/8000=$96 per unit Outgoing Shipments for luxury=100/175*560,000=$320,000/8000=$40 per unit

Setups for Exclusive=30/80*672,000=$252,000/15,000=$16.8 per unit Machine hours for Exclusive=22,500/38,500*1,848,000=$1,080,000/15,000=$72 per unit Outgoing Shipments for Exclusive=75/175*560,000=$240,000/15,000=$16 per unit

b) Assume that the current selling price of a Luxury electric sleeping bag is $260 and the marketing team is contemplating a $30 discount to stimulate sales. Is this discount advisable? Briefly discuss. (5 marks) Selling price=$260 Cost price=$243.5

New selling price with discount=$260-$30=$230.
Profit=Selling Price- Cost price=$230-$243.5=-$13.5
The discount is not advisable because the cost of the luxury electric bag is $243.5 which is greater than the discounted selling price ($230). Preston Piston will make a loss of $13.5 if the marketing team to offer a discount of $30 to stimulate sales.

C) Present arguments for and against the statement, “Activity-based costing (ABC) systems are not appropriate for service organizations”. (Maximum 1 page or 500words). (7 marks) Activity Based Costing is an accounting practice that assigns costs to activities based on their use of resources, rather than products or services. This enables resources and other associated costs to be more accurately attributed to the products and the services which they use. As activity based costing directly assigns costs to activities, it can be an extremely useful tool for anyone involved in process improvement and cost reduction programs. Using activity based costing means that all the individual activities that are part of a process can be accurately priced. Advantages and Disadvantages

The main advantages of ABC are:
Assesses costs of individual activities, based on their use of resources Eliminating unprofitable items from the product line, thereby increasing profitability without increasing prices, a valuable option in...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Cost Accounting and Job Order Cost Essay
  • Management accounting 1 Essay
  • Human Resource Accounting: Recognition and Disclosure of Accounting Methods & Techniques Essay
  • Importance of Managerial Accounting Essay
  • Overhead Allocation of Cost Essay
  • Types of Cost Audit Essay
  • Essay on cost accounting Chapter 1
  • Essay on Cost Allocation Method

Become a StudyMode Member

Sign Up - It's Free