- 15 Marks
MA – L2 – Q11 – Activity-based costing
Question
ADDO COMPANY
ADDO Company has a single production process, for which the following costs have been estimated for the period ending 31st December Year 7:
| GH¢ | |
|---|---|
| Material receipt and inspection costs | 31,200 |
| Power costs | 39,000 |
| Material handling costs | 27,300 |
ADDO Company makes three products – X, Y, and Z. These products are made by the same group of employees, using power drills. The employees are paid GH¢8 per hour. The following budgeted information has been obtained for the period ending 31st December Year 7:
| Product X | Product Y | Product Z | |
|---|---|---|---|
| Production quantity (units) | 2,000 | 1,500 | 800 |
| Batches of material | 10 | 5 | 15 |
| Direct material (metres) | 5 | 3 | 4 |
| Direct material cost (GH¢) | 6 | 4 | 6 |
| Direct labour (minutes) | 30 | 20 | 15 |
| Number of power drill operations (per unit) | 3 | 2 | 3 |
Overhead costs are currently absorbed into the cost of production units using an absorption rate per direct labour hour. A factory-wide absorption rate is used for work in all the production departments.
An activity-based costing investigation has revealed that the cost drivers for the overhead costs are as follows:
- Material receipt and inspection: number of batches of material
- Power: number of power drill operations
- Material handling: quantity of material (metres) handled.
Required:
Prepare a summary of the budgeted production cost per unit for each of the products X, Y, and Z for the period ending 31 December Year 7:
(a) using the existing method for the absorption of overhead costs, and
(b) using an approach based on activity-based costing, and the information available about cost drivers.
Answer
11 ADDO COMPANY
(a) Current full costing method
| Budgeted hours | hours |
|---|---|
| Product X: (2,000 × 30 / 60) | 1,000 |
| Product Y: (1,500 × 20 / 60) | 500 |
| Product Z: (800 × 15 / 60) | 200 |
| Total | 1,700 |
Overhead recovery rate using the current absorption costing method:
<math xmlns=”http://www.w3.org/1998/Math/MathML” display=”block”><semantics><mrow><mfrac><mtext>Total overheads</mtext><mtext>Total hours</mtext></mfrac><mo>=</mo><mfrac><mrow><mtext>GH¢</mtext><mo stretchy=”false”>(</mo><mn>31</mn><mo separator=”true”>,</mo><mn>200</mn><mo>+</mo><mn>39</mn><mo separator=”true”>,</mo><mn>000</mn><mo>+</mo><mn>27</mn><mo separator=”true”>,</mo><mn>300</mn><mo stretchy=”false”>)</mo></mrow><mrow><mn>1</mn><mo separator=”true”>,</mo><mn>700</mn><mtext> hours</mtext></mrow></mfrac><mo>=</mo><mtext>GH¢</mtext><mn>57.35</mn></mrow><annotation encoding=”application/x-tex”>\frac{\text{Total overheads}}{\text{Total hours}} = \frac{\text{GH¢}(31,200 + 39,000 + 27,300)}{1,700 \text{ hours}} = \text{GH¢}57.35</annotation></semantics></math>
Full cost per unit (current method)
| Product X | Product Y | Product Z | |
|---|---|---|---|
| GH¢ | GH¢ | GH¢ | |
| Direct materials | 6.00 | 4.00 | 6.00 |
| Direct labour | |||
| GH¢8 × 30 / 60 | 4.00 | ||
| GH¢8 × 20 / 60 | 2.67 | ||
| GH¢8 × 15 / 60 | 2.00 | ||
| Overheads | |||
| GH¢57.35 × 30 / 60 | 28.68 | ||
| GH¢57.35 × 20 / 60 | 19.12 | ||
| GH¢57.35 × 15 / 60 | 14.34 | ||
| Total | 38.68 | 25.79 | 22.34 |
(b) ABC method
Materials receipt and inspection costs:
Cost driver = Number of batches of material
Total number of batches = (10 + 5 + 15) = 30
Overhead cost per batch = GH¢31,200 / 30 batches = GH¢1,040 per batch
Power costs:
Cost Driver = Number of power drill operations
Total number of drill operations = (2,000 × 3) + (1,500 × 2) + (800 × 3) = 11,400
Overhead cost per drill operation = GH¢39,000 / 11,400 = GH¢3.42
Materials handling costs:
Cost driver = Quantity of materials handled
Number of metres handled = (2,000 × 5) + (1,500 × 3) + (800 × 4) = 17,700
Overhead costs per metre handled = GH¢27,300 / 17,700 = GH¢1.54
Overhead costs
| Product X | Product Y | Product Z | |
|---|---|---|---|
| GH¢ | GH¢ | GH¢ | |
| Materials receipt | |||
| GH¢1,040 × 10 | 10,400 | ||
| GH¢1,040 × 5 | 5,200 | ||
| GH¢1,040 × 15 | 15,600 | ||
| Power | |||
| GH¢3.42 × 2,000 × 3 | 20,520 | ||
| GH¢3.42 × 1,500 × 2 | 10,260 | ||
| GH¢3.42 × 800 × 3 | 8,208 | ||
| Materials handling | |||
| GH¢1.54 × 2,000 × 5 | 15,400 | ||
| GH¢1.54 × 1,500 × 3 | 6,930 | ||
| GH¢1.54 × 800 × 4 | 4,928 | ||
| Total | 46,320 | 22,390 | 28,736 |
| Number of units produced | 2,000 | 1,500 | 800 |
| Overhead cost per unit | GH¢23.16 | GH¢14.93 | GH¢35.92 |
Cost per unit (ABC method)
| Product X | Product Y | Product Z | |
|---|---|---|---|
| GH¢ | GH¢ | GH¢ | |
| Direct materials | 6.00 | 4.00 | 6.00 |
| Direct labour | 4.00 | 2.67 | 2.00 |
| Overheads | 23.16 | 14.93 | 35.92 |
| Total | 33.16 | 21.60 | 43.92 |
- Topic: Activity-based costing
- Uploader: Salamat Hamid