- 10 Marks
Question
Dunning Limited has recently introduced an Activity Based Costing System and has
provided the following details for the month of January:
During the month, 500 units of Product Y were produced. This production run required
100 parts and 150 maintenance hours; 5 material requisitions were made and 10
employees worked on the units.
Required:
i) Using Activity Based Costing, calculate the total amount of overhead absorbed by each
unit of Product Y. (7 marks)
ii) Identify THREE different types of controls and explain how activity based costing assists
in the control of costs?
Answer
i) Product Y – Overhead Absorption
| Cost Pool | Workings | GH¢ |
|---|---|---|
| Parts | 100 parts x GH¢20 per part | 2,000 |
| Maintenance | 150 hours x GH¢30 per hour | 4,500 |
| Stores | 5 requisitions x GH¢500 per requisition | 2,500 |
| Administration | 10 employees x GH¢50 per employee | 500 |
| Total Overhead Absorbed | 9,500 | |
| Per unit | 9,500 / 500 units | 19 |
ii) Three Types of Controls and Activity-Based Costing
| Control Type | Description | How ABC Assists |
|---|---|---|
| Action or Behavioral Controls | Observing individual actions to ensure they align with cost control measures, such as work studies or quality controls. | ABC provides detailed information on cost drivers, which helps in identifying areas needing corrective actions. |
| Personnel and Cultural Controls | Establishing values and norms to influence employee performance and cost efficiency. | ABC helps in understanding the cost implications of various activities, which can guide training and cultural alignment. |
| Results and Output Controls | Collection and analysis of performance data to assess the outcomes of work efforts. | ABC provides accurate cost data on outputs, which helps in evaluating performance and ensuring results meet expectations. |
- Tags: Activity-Based Costing, Cost Control, Cost Pools, Overhead Absorption, Product costing
- Level: Level 2
- Topic: Activity-based costing
- Series: MAY 2018
- Uploader: Kwame Aikins