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:
Budgeted volume (units)
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:
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)
Manufacturing Overhead cost
Unit Manufacturing Cost
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.
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...
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