- 10 Marks
Question
a) Santo has three product lines: P1, P2, and P3. Since its inception, the company has been using a single direct labour cost percentage to assign overhead costs to products. Despite P3 being a relatively new product line, it is attracting additional business. However, increasing overhead costs have resulted in loss-making in recent times. P2 particularly has been a significant product line since its inception. However, it has lost considerable market share due to an increase in overhead cost in recent times and a consequent increase in price per unit. Management is, therefore, convinced that the costing system needs some review. A team led by the management accountant was put together to develop an improved system of costing based on activities. The team spent several weeks collecting data for the different activities and products.
Below is data on Santo’s three product lines and overhead costs for the current accounting period:
| P1 | P2 | P3 | |
|---|---|---|---|
| Production volume (units) | 7,500 | 12,500 | 4,000 |
| Selling price per unit (GH¢) | 47 | 80 | 68 |
| Material cost per unit (GH¢) | 18 | 25 | 16 |
| Direct labour cost per unit (GH¢) | 4 | 8 | 6.4 |
| Materials movements (in total) | 4 | 25 | 50 |
| Machine hours per unit | 0.5 | 0.5 | 0.2 |
| Set-ups (in total) | 1 | 5 | 10 |
| The proportion of engineering work | 30% | 20% | 50% |
| Orders packed (in total) | 1 | 7 | 22 |
Activities overhead cost:
- Machine maintenance and depreciation: GH¢390,000
- Material receiving and handling: GH¢150,000
- Engineering: GH¢100,000
- Packing: GH¢60,000
- Set-up labour: GH¢18,688
- Total: GH¢718,688
Required: Identify for each overhead activity, an appropriate cost driver from the information supplied, and then calculate the product unit costs using a system that assigns overheads based on the use of activities. (10 marks)
Answer
Unit Costs Calculation for Santo’s Product Lines
| Overhead Costs | P1 (GH¢) | P2 (GH¢) | P3 (GH¢) |
|---|---|---|---|
| Direct materials | 18.00 | 25.00 | 16.00 |
| Direct labour | 4.00 | 8.00 | 6.40 |
| Prime cost | 22.00 | 33.00 | 22.40 |
| Receiving/materials handling | 1.01 | 3.80 | 23.73 |
| Maintenance and depreciation | 18.06 | 18.06 | 7.22 |
| Set-up labour | 0.16 | 0.47 | 2.92 |
| Engineering | 4.00 | 1.60 | 12.50 |
| Packing | 0.27 | 1.12 | 11.00 |
| Sub-total overhead costs | 23.50 | 25.05 | 57.37 |
| Total unit cost | 45.50 | 58.05 | 79.77 |
ABC Workings:
- Receiving and handling materials cost
Total cost = GH¢150,000
Cost driver = Number of materials movements
Number of materials movements = 4 + 25 + 50 = 79 movements
Cost per material movement = GH¢150,000 / 79 = GH¢1,898.73- Cost per unit of P1 = (GH¢1,898.73 × 4) / 7,500 = GH¢1.01
- Cost per unit of P2 = (GH¢1,898.73 × 25) / 12,500 = GH¢3.80
- Cost per unit of P3 = (GH¢1,898.73 × 50) / 4,000 = GH¢23.73
- Maintenance and depreciation cost
Total cost = GH¢390,000
Cost driver = Number of machine hours
Number of machine hours = (0.5 × 7,500) + (0.5 × 12,500) + (0.2 × 4,000) = 10,800
Cost per machine hour = GH¢390,000 / 10,800 = GH¢36.11- Cost per unit of P1 = GH¢36.11 × 0.5 = GH¢18.06
- Cost per unit of P2 = GH¢36.11 × 0.5 = GH¢18.06
- Cost per unit of P3 = GH¢36.11 × 0.2 = GH¢7.22
- Set-up labour cost
Total cost = GH¢18,688
Cost driver = Number of set-ups
Number of set-ups = 1 + 5 + 10 = 16
Cost per set-up = GH¢18,688 / 16 = GH¢1,168- Cost per unit of P1 = (GH¢1,168 × 1) / 7,500 = GH¢0.16
- Cost per unit of P2 = (GH¢1,168 × 5) / 12,500 = GH¢0.47
- Cost per unit of P3 = (GH¢1,168 × 10) / 4,000 = GH¢2.92
- Engineering cost
Total cost = GH¢100,000
Cost driver = Proportion of engineering work- Cost per unit of P1 = (GH¢100,000 × 30%) / 7,500 = GH¢4.00
- Cost per unit of P2 = (GH¢100,000 × 20%) / 12,500 = GH¢1.60
- Cost per unit of P3 = (GH¢100,000 × 50%) / 4,000 = GH¢12.50
- Packing cost
Total cost = GH¢60,000
Cost driver = Number of orders packed
Number of orders packed = 1 + 7 + 22 = 30
Cost per order = GH¢60,000 / 30 = GH¢2,000- Cost per unit of P1 = (GH¢2,000 × 1) / 7,500 = GH¢0.27
- Cost per unit of P2 = (GH¢2,000 × 7) / 12,500 = GH¢1.12
- Cost per unit of P3 = (GH¢2,000 × 22) / 4,000 = GH¢11.00
- Tags: Activity-Based Costing, Cost Drivers, Overhead Allocation, Product costing
- Level: Level 2
- Topic: Activity-based costing
- Series: MAY 2021
- Uploader: Dotse