Scribd
Upload
119 views

Simple Problem On ABC: Required

The document discusses four cases related to activity based costing and activity based management. Case 1 involves a company that produces calculators and allocates overhead costs to products using different cost drivers. Case 2 involves allocating overhead costs for a furniture company across chair models using activity cost pools and different cost drivers. Case 3 examines the income statements and cost structures of two electronic products. The controller advocates for implementing activity based costing to better understand product profitability. Case 4 raises issues with applying activity based costing and measuring all activities, and questions the pressure faced by the controller to adjust numbers to protect certain product lines.

Uploaded by

Shreshtha Verma
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
119 views

Simple Problem On ABC: Required

The document discusses four cases related to activity based costing and activity based management. Case 1 involves a company that produces calculators and allocates overhead costs to products using different cost drivers. Case 2 involves allocating overhead costs for a furniture company across chair models using activity cost pools and different cost drivers. Case 3 examines the income statements and cost structures of two electronic products. The controller advocates for implementing activity based costing to better understand product profitability. Case 4 raises issues with applying activity based costing and measuring all activities, and questions the pressure faced by the controller to adjust numbers to protect certain product lines.

Uploaded by

Shreshtha Verma
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

ACTIVITY BASED COSTING AND ACTIVITY BASED MANAGEMENT

The cases given below are from standard books on this subject
Simple problem on ABC
ABC company has been incurring two types of overhead costs- material handling and quality inspection.
The costs expected for these categories for the coming year are as follows:
Material handling
Rs.
10,00,000
Quality inspection
Rs.
30,00,000
The company currently charges overhead using direct labour hours and expected actual capacity. This
figure is 50,000 direct labour hours.
The factory manager has been asked to submit a bid and has assembled the following data concerning the
proposed job.
Job
Direct Materials
Rs.
37,000
Direct labour (1,000 hours)
Rs.
70,000
Number of material moves
10
Number of inspections
5
The manager has been informed that many competitors use an ABC approach to assign overheads to jobs.
Before submitting his bid for the proposed job, he wants to assess the effects of this alternative approach.
He estimates that the expected number of material moves for all jobs during the year is 1,000. He also
expects 5,000 quality inspections to be performed.
Required:
Compute the total cost of the proposed job using direct labour hours to assign overhead. Assuming the
bid price is full manufacturing cost plus 25%, what would be the managers bid?
Compute the total cost of the job using the number of material moves to allocate material-handling costs
and the number of inspections to allocate the quality inspections costs. Assume bid price is full
manufacturing costs plus 25%. What should be his bid using this approach?
Which approach do you think best reflects the actual cost of the job? Explain
Case 1: Citizen company case
Citizen Company produces mathematical and financial calculators. Data related to the two products is
presented below:
Mathematical
Financial
Annual production in units
50,000
1,00,000
Direct material costs
1,50,000
3,00,000
Direct manufacturing labour costs
50,000
1,00,000
Direct manufacturing labour hours
2,500
1,00,000
Machine hours
25,000
50,000
Number of production runs
50
50
Inspection hours
1,000
500
Both the product passes through department 1 and department 2. The departments combined
manufacturing overhead costs are:
Machining costs Rs 3,75,000
Set up costs Rs 1,20,000
Inspection costs Rs 1,05,000
Required
1. Compute the manufacturing overhead cost per unit for each product.
2. Compute the manufacturing cost per unit for each product.

Case 3: Godrej Ltd Case


Godrej Ltd manufactures a variety of prestige boardroom chairs. Its job costing system uses an activity
based approach. There are two direct cost categories (direct materials and direct manufacturing labour)
and three indirect cost pools. The cost pools represent three activity areas at the plant
Manufacturing activity area
Budgeted costs for 2006
Cost driver used as
Cost allocation rate
allocation base
Material handling
1,00,000 Parts
0.25
Cutting
10,00,000 Parts
2.50
Assembly
10,00,000 Direct manufacturing
25.00
labour hours
Two styles of chairs were produced in march, the executive chair and the chairman chair. Their quantities,
direct material costs, and other data for march are as follows:
Units produced
Direct
material Number of parts
Direct
costs
manufacturing
labour hours
Executive chairs
5,000
3,00,000
1,00,000
7,500
Chairman chairs
100
12,500
3,500
500
The direct manufacturing labour rate is Rs 20 per hour. Assume no beginning or ending inventory.
1. Compute the march total manufacturing costs and unit costs of the executive chair and the
chairman chair.
2. The upstream activities to manufacturing (R&D and design) and the downstream activities
(marketing, distribution and customer service) were analyzed, and the unit costs in were budgeted
as follows
Upstream activities
Downstream activities
Executive chairs
30
55
Chairman chair
73
118
Compute the full costs per unit of each chair.(full costs of each chair are the sum of the costs of all
business functions)
3. Compare the per unit cost figure for the executive chair and the chairman chair computed in 1 and
2 above. Why do the costs differ for each chair? Why might these differences be important to
Godrej ltd?
Case 4: Sony Electronics Case
Sony electronics a division of Sony corporation, manufactures two large screen models the Flatron, which
has been produced since 1998 and sells for Rs 45,000 and the Wega, a newer model introduced in early
2001 that sells for Rs 57,000. Based on the following income statement for the current year ended 31 st
march, senior management at Sony have decided to concentrate Sonys marketing resources on Wega and
to phase out the Flatron model.
Sony electronics
Income statement
For the current fiscal year ended 31st march
Particulars
Flatron
Wega
Total
Revenues
19800000
4560000
24360000
Cost of goods sold
12540000
3192000
15732000
Gross margin
7260000
1368000
8628000
Selling and administrative expenses
5830000
978000
6808000
Operating income
1430000
390000
1820000
Units produced and sold
440
80
Net income per unit sold
3250
4875
Unit cost for Flatron and Wega are as follows;
Particulars
Flatron
Wega
Direct materials
10,400
29,200
Direct manufacturing labour

Flatron(1.5 hrs @ Rs 600 per hour)


900
Wega(3.5 hrs @ Rs 600 per hour)
2,100
Machine costs
Flatron(8 hrs @ Rs 900 per hour)
7,200
Wega(4 hours @ Rs 900 per hour)
3,600
Manufacturing overhead other than machine costs
10,000
5,000
Total costs
28,500
39,900
Machine costs include lease costs of the machine, repairs and maintenance
Manufacturing overheads was allocated to products based on machine hours at the rate of Rs 1,250 per
hour.
Sonys controller Susan Thomas is advocating the use of ABC costing and activity based management
and has gathered the following information about the companys manufacturing overhead costs for the
current year ended March 31.
Activity centre
Total activity costs
Units of the cost allocation base
Flatron
Wega
Total
Soldering (number of soldering points)
9,42,000
11,85,000
3,85,000 15,70,00
0
Shipments (No of shipments)
8,60,000
16,200
3,800
20,000
Quantity control(No of inspection)
12,40,000
56,200
21,300
77,500
Purchase orders (number of orders)
9,50,400
80,100
1,09,980 1,90,080
Machine power (machine hours)
57,600
1,76,000
16,000 1,92,000
Machine set ups (number of set ups)
7,50,000
16,000
14,000
30,000
Total manufacturing overheads
48,00,000
After completing her analysis Thomas shows the results to Fred Duval , the Sony division president.
Duval does not like what he sees. If you show headquarters this analysis, they are going to ask us to
phase out Wega line which we have just introduced. The whole costing stuff has been a major problem for
us. First Flatron was not profitable and now Wega.
Looking at the ABC analysis, I see two problems. First, we do many more activities than the ones you
have listed. If you had included all activities, may be your conclusions would be different. Second you
have used number of set ups and number of inspections as the bases. The numbers would be different had
you used set up hours and inspection hours instead. I know that measurement problems precluded you
from using these other cost allocation bases, but I believe you ought to make some adjustments to our
current numbers to compensate for these issues. I know you can do better. We cant afford to phase out
either product.
Thomas knows her numbers are fairly accurate. On a limited sample, she calculates the profitability of
Wega and Flatron using more and different allocation bases. The set of activities and activity rates she had
used resulted in numbers that closely approximate those based on more detailed analyses. She is confident
that headquarters, knowing that Wega was introduced only recently, will not ask Sony to phase it out. She
is also aware that a sizeable portion of Duvals bonus is based on division revenues. Phasing out either
product would adversely affect his bonus. Still, she feels some pressure from duval to do something.
Required
1. Using activity based costing, calculate the profitability of the Wega and Flatron models
2. Explain briefly why these numbers differ from the profitability of the Wega and Flatron models
calculated using Sonys existing costing system.

You might also like