NMIT

ACC/NZD 602 Management Accounting

Semester 2 2016
Assignment 1

Weighting 30%

Add a declaration that the work is your own work

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Due date 3pm 21 September 2016

Q1. ABC Classification Activity 13 marks

Q2. Calculate ABC costs 24 marks
Q3 Compare traditional costing to ABC 11 marks
Q4 Customer margins 15 marks
Q5 Costs per unit 15 marks
Q6 Preparation of costing statements 15 marks
Q7 ABC and traditional costing 30 marks

Total 123 marks

Q1. ABC Classification Activity

Complete the following table and state if the following activities are:

Unit level activities;

Batch level activities;
Product level activities; or
Factory level activities.

Also, give an example of an appropriate cost driver and state why it is appropriate.

Activity Level Driver Why

Assembling
Drilling
Enginerring changes
Equipment set up
inspection
Material handling
Plant depreciation
Plant management
salaries
Pressing
Product design
Property taxes
Sewing
Utilities

13 marks
Q2. Calculate ABC costs

Old Hill Ltd uses ABC. It has three cost pools:

Processing;
Setting Up; and
Other

The companys overhead costs are factory utilities and indirect labour. These are
allocated in proportion to the activity cost pools consumption of resources. Costs in
the processing cost pool are assigned to products based on machine hours. The setting
up cost pool are assigned based upon the number of batches. Costs in the other pool
are not assigned to products. Data is given below:

Factory utilities (total) $29,000

Indirect labour (total) $7,000

Distribution of resource consumption across activity pool costs

Processing Setting up Other

Factory utilities 0.4 0.1 0.5

Indirect labour 0.5 0.2 0.3

MHs Batches

Product X7 2,900 700

Product L4 7,100 300

Total 10,000 1,000

Product X7 Product L4

Sold $54,000 $85,100

Direct materials $19,100 $33,500
Direct labour $26,300 $35,000

Required:

1. Assign overhead costs to activity cost pools using ABC;

2. Calculate activity rates for each activity cost pool using ABC;
3. Determine the amount of overhead cost that would be assigned to each product
using ABC; and
4. Determine the product margins for each product using ABC.

24 Marks
Q3 Compare traditional costing to ABC

Hawthorn Exhausts Ltd makes exhaust systems for various car manufacturers.
Hawthorn uses ABC and its cost allocation rates are:

Activity Allocation base Activity rate

Machining Number of machine hours $30.00 per machine hour

Assembling Number of parts $0.50 per part
Packaging number of finished systems $0,90 per system

Jaguar cars has made a request for an extra 50,000 exhaust systems. This will require
400 machine hours to fabricate parts. The exhaust system needs:

Twenty parts;
Direct materials of $11; and
0.2 direct labour hours at $25 per hour.

Hawthorn applies a 30% mark up to its calculated cost price for the sale to Jaguar.

You are required to:

a) Using ABC calculate:

a. The total cost of producing 50,000 exhaust systems; and
b. The sale price to Jaguar. (5 marks)
b) Using traditional costing, using a plant-wide overhead rate of $65 per direct
labour hours, calculate:
a. The total cost of producing 50,000 exhaust systems; and
b. The sale price to Jaguar. (4 marks)
c) How will ABC allow Hawthorn to make a better decision in respect of its sale
price to Jaguar? (2 marks)

Total 11 marks
Q4 Customer margins

Rondon Housecleaning provides cleaning services. The company uses ABC. The data
is as follows:

Activity cost pool Total cost Total activity

Cleaning $252,787 44,900 hours

Job support $73,758 5,700 jobs
Client support $7,668 279 clients
Other $230,000 Not applicable

Total $564,213

The other activity consists of costs of idle capacity and organisation sustaining costs.

One client, The Olsen family, requested 49 jobs during the year that required a total of
245 hours of housecleaning. The fee for this was $2,500.

Required:

1. Compute the activity rates for the activity cost pools;

2. Using ABC compute the margin for the Olsen family; and
3. Assuming the company choses to use tradition costing in which all costs are
allocated to customers on the basis of cleaning hours, compute the margin for
the Olsen family.

15 marks
Q5 Costs per unit

Kanu Ltd makes two products and uses ABC. It will make and sell 1,400 of product F
and 1,800 of product G. Data for the three cost pools are shown below:

Activity Cost Pool Cost Product F Product G

Machine set ups $10,800 80 set ups 100 set ups
Purchase orders $77,720 510 orders 1,010 orders
General factory $75,920 2,240 hours 3,600 hours

Required:

Using ABC determine the overhead cost per unit for each product.

15 marks
Q6 Preparation of costing statements

The following information is for Smethwick Iron Works Ltd

Product information

Product X Y Z

Sales and production (units) 50 40 30

Selling price per unit $45 $95 $73
Direct costs per unit $32 $84 $65
Machine dept MH per unit 2 5 4
Assembly DLH per unit 7 3 2

Overheads allocated and apportioned to production departments are to be recovered in

product costs as follows:

Machine department at $1-20 per MH

Assembly department at $0.825 per DLH

You ascertain that the above overheads could be re-analysed into cost pools as
follows:

Cost Pool $,000 Cost Driver Quantity for period

Machine services 357 Machine hours 420,000

Assembly services 318 Direct Labour Hrs 530,000
Set up costs 26 Set ups 520
Order processing 156 Customer orders 32,000
Purchasing 84 Supplier orders 11,200

Total 941

You have also been provided with the following estimates for the period:

Product X Y Z
No of set ups 120 200 200
Customer orders 8,000 8,000 16,000
Supplier orders 3,000 4,000 4,200

Required:

Prepare profit statements using

1. Conventional absorption costing
2. ABC

15 marks
Q7 ABC and traditional costing

The following information is available for Rowley Regis Ltd.

Product X Y Z Total
1 Production and sales (units) 30,000 20,000 8,000
2 Raw material usage (units) 5 5 11
3 Direct material cost $25 $20 $11 $1,238,00
0
4 Direct labour hours 1 1/3 2 1 88,000
5 Machine hours 1 1/3 1 2 76,000
6 Direct labour cost $8 $12 $6
7 No of production runs 3 7 20 30
8 No of deliveries made 9 3 20 32
9 No of receipts (2 X 7) 15 35 220 270
10 No of production orders 15 10 25 50

Note item 9: Rowley Regis operates a just in time system and receives each
component per production run

Overhead costs:
Set ups $30,000
Machines $760,000
Receiving $435,000
Packing $250,000
Engineering $373,000

Total $1,848,000

In the past Rowley Regis has allocated overheads to products on the basis of direct
labour hours, but the majority of overheads are more closely related to machine hours

The company has recently redesigned its system for recovering overheads using two
volume related bases, machine hours and a materials handling overhead rate for
recovering overheads in the receiving department.

Both the current and previous cost systems report low profit margins for product X,
which is the companys highest selling product. This is a concern to the company so it
has tried to analyse the costs using ABC to compute activity based costs.

Required:
1. Calculate the product costs using traditional volume related costing based on
the assumption:
a. All overheads are recovered on the basis of direct labour hours;
b. The overheads in the receiving department are recovered by a materials
handling overhead rate and the remaining overheads are recovered
using a machine hour rate;
2. Compute product costs using ABC; and
3. Explain the differences between the product computations in 1) and 2).

Marks 30