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Week 4 - Seminar 3 Trimake LTD Recording Version

1. Trimake Limited uses both traditional costing and activity-based costing (ABC) to calculate the cost per unit of three products. 2. Under traditional costing, overhead is allocated based on machine hours, but ABC allocates overhead based on activities like set-ups, machining, material handling, and inspections. 3. Using ABC, the cost per unit increases for Products X and Y but decreases for Product Z, compared to traditional costing, because of the different allocation methods between the two approaches.

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48 views

Week 4 - Seminar 3 Trimake LTD Recording Version

1. Trimake Limited uses both traditional costing and activity-based costing (ABC) to calculate the cost per unit of three products. 2. Under traditional costing, overhead is allocated based on machine hours, but ABC allocates overhead based on activities like set-ups, machining, material handling, and inspections. 3. Using ABC, the cost per unit increases for Products X and Y but decreases for Product Z, compared to traditional costing, because of the different allocation methods between the two approaches.

Uploaded by

china xi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 27

APC3 STRATEGIC MANAGEMENT

09 ACCOUNTING WEEK 2
TRIMAKE LIMITED
• Traditional method • ABC method
A. COST PER UNIT FOR EACH PRODUCT USING
CONVENTIONAL METHODS.

Product XProduct Y Product Z


(£) (£) (£)

Direct Labour @ £6/hour 3 9 6


Direct Materials 20 12 25
Production Overhead @
£28 per Machine Hour 42 28 84
65 49 115
B. COST PER UNIT USING ABC PRINCIPLES.

Five Stage Process STAGE 1


• Calculate Total Production Overhead.

STAGE 2
• Allocate Overhead Costs to Cost Pools.

STAGE 3
• Establish Cost Driver Rates.

STAGE 4
• Assign Overhead Costs to each Product.

STAGE 5
• Recalculate Production Cost per Unit using ABC.
STEP 1
Identify costly activities required to complete products. Any process or procedure that
consumes overhead resources
In this case :
set-up cost
machining
materials handling
Inspection
STEP 2
Assign overhead costs to the activities identified in step 1
This step requires that overhead costs associated with each activity be assigned to the
activity
In this case:

Use the percentages to find amounts for each activities


STEP 3
Identify the cost driver for each activity
A cost driver is the action that causes (or “drives”) the costs
associated with the activity

Activity Cost driver


Set up cost Cost set-up cost
machining Cost per machine hour
Materials handling Cost per material mvt
inspection Cost per inspection
STEP 4
• Calculate a predetermined overhead rate for each
activity
Cost set-up cost Set up costs ÷ # of set ups
Cost per m/hr machining÷ (machine Unit x Volume
Cost per material Materials handling÷ # of movements
of materials
Cost per Inspection Inspection ÷ number of inspections
STEP 5
Allocate overhead costs to products
TOTAL PRODUCTION OVERHEAD.

(£)
Product X 31,500 (750 x £42)
Product Y 35,000 (1250 x £28)
Product Z 588,000 (7000 x £84)
654,500
ALLOCATION OF OVERHEAD COSTS TO COST POOLS

(£)
Set Up Cost 229,075 (35%)
Machining 130,900 (20%)
Materials Handling 98,175 (15%)
Inspection 196,350 (30%)
654,500
COST DRIVER RATES

(£)
Cost per Set Up 341.903 (229,075/670)
Cost per Machine Hour 5.60 (130,900/23,375)
Cost per Material Movement 818.125 (98,175/120)
Cost per Inspection 196.35 (196,350/1000)
ASSIGN OVERHEAD COSTS TO EACH PRODUCT

Product X Product Y Product Z


(£) (£) (£)
Set-up cost @ £341.903 25,643 39,319 164,113
Machining @ £5.60 per
Machine Hour 6,300 7,000 117,600
Materials Handling @ £818.125
Per Movement 9,817 17,181 71,177
Inspection @ £196.35 per
Inspection 29,453 35,343 131,554
71,213 98,843 484,444
Number of Units 750 1 250 7 000
Overhead Cost per Unit £95 £79 £69
PRODUCTION COST PER UNIT USING ABC

Product X Product Y Product Z


(£) (£) (£)
Direct Labour 3 9 6
Materials 20 12 25
Production Overhead 95 79 69
118 100 100

Change (compared with


Traditional method) +82% +104% -13%
REASONS FOR DIFFERENCES IN COSTS

• Different methods of allocating overheads – Traditional based on machine hours whilst


ABC is based on set-ups, material movements, machine hours & inspections.
• Traditional Method – Product X = 4.8%
Product Y = 5.3%
Product Z = 89.9%
• ABC Method - Product X = 10.9%
Product Y = 15.1%
Product Z = 74.0%
• Unit cost therefore higher for Product X & Y and lower for Product Z using ABC
method of allocating overheads.
CONVENTIONAL METHOD
•Supporting Calculations Part a. Trimake
 
•Direct Labour
 
•Product X 0.5 hours @ £6/hr = £3

•Product Y 1.5 hours @ £6/hr = £9


 
•Product Z 1 hour @ £6/hr = £6
CONVENTIONAL METHOD
•Production Overhead
 
•Production Overheads absorbed on a machine hour basis at a rate of £28 per
hour :-
 
•Product X 1.5 hours @ £28/hr = £42
 
•Product Y 1 hour @ £28/hr = £28
 
•Product Z 3 hours @ £28/hr = £84
CALCULATIONS COST DRIVER RATES – TRIMAKE
•Machine Hours
• 
•Calculated using initial information
 
•Product X 750 units @ 1.5 hours = 1,125
 
•Product Y 1250 units @ 1 hour = 1,250
 
•Product Z 7000 units @ 3 hours = 21,000
_________________
•Total = 23,375 hours
ASSIGNING OVERHEAD COSTS TO EACH PRODUCT
•Set Up Cost
 
•Product X 75 Set Ups @ £341.903 per Set Up
= £25,643
 
•Product Y 115 Set Ups @ £341.903 per Set Up
= £39,319
 
•Product Z 480 Set Ups @ £341.903 per Set Up
= £164,113
ASSIGNING OVERHEAD COSTS TO EACH PRODUCT
•Machining Cost
 
•Product X 1125 Machine Hrs @ £5.60 per Machine Hr
= £6,300
 
•Product Y 1250 Machine Hrs @ £5.60 per Machine Hr
= £7,000
 
•Product Z 21000 Machine Hrs @ £5.60 per Machine Hr = £117,600
ASSIGNING OVERHEAD COSTS TO EACH PRODUCT
•Materials Handling Cost
 
•Product X 12 Material Movements @ £818.13 per Movement
= £9.817
 
•Product Y 21 Material Movements @ £818.13 per Movement
= £17,181
 
•Product Z 87 Material Movements @ £818.13 per Movement
= £71,177
ASSIGNING OVERHEAD COSTS TO EACH PRODUCT
•Inspection Cost
 
•Product X 150 Inspections @ £196.35 per Inspection
= £29,453
 
•Product Y 180 Inspections @ £196.35 per Inspection
= £35,343
 
•Product Z 670 Inspections @ £196.35 per Inspection
= £131,554
COST DRIVER RATES PER UNIT
•Set up cost = total set up costs
total # of set ups
•Machine = total cost of machining
(machine per unit x Volume units)
•Materials = total cost
# of movements of materials
•Inspection = total cost
# of inspections
SUPPORTING CALCULATIONS FOR PERCENTAGE ANALYSIS OF OVERHEADS

Traditional Method
•Product X - 31,500 / 654,500 = 4.8%

•Product Y - 35,000 / 654,500 = 5.3%

•Product Z - 588,000 / 654,500 = 89.9%


SUPPORTING CALCULATIONS FOR PERCENTAGE ANALYSIS OF OVERHEADS

ABC Method
•Product X - 71,213 / 654,500 = 10.9%

•Product Y - 98,843 / 654,500 = 15.1%

•Product Z - 484,444 / 654,500 = 74.0%


ANY QUESTIONS??

Next Week:

Workshop 4 – BIL
Motor Components Ltd.

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