INTRODUCTION TO MANAGEMENT ACCOUNTING ASSIGNMENT
Jackson Ltd manufactures two products FRED and MARTHA .The firm uses a single plantwide overhead rate based on direct labour hours. Product costing data is as follows:
FRED MARTHA
Production Quantity 1000 units 5000 units
Direct material $40 $60
Direct labour 30(2 hours) 45 ( 3 hours)
Manufacturing overhead 96( 2 hours) 144 ( 3 hours)
Total cost per unit $166 $249
Manufacturing overhead is currently calculated by using a conventional volume based approach using a predetermined overhead rate based on the number of direct labour hours used to produce the product.The manufacturing overhead budget consistsof the following overhead costs:
Machine related costs $450,000
Setup and inspection 180,000
Engineering 90,000
Plant related costs 96,000
Total $816,000
Currently Jackson prices its products at 120% of total manufacturing cost .It has noticed that a competitor is producing MARTHA and has been pricing its products at $230 each and that sales of MARTHA have been declining over the last year.Because of thisthe accountant at Jackson has suggested that Activity Based costing should be considered .He suggested the following details
Activity Cost Pool Cost driver Budgeted level
Machine related costs Machine hours 9000 hours
Setup and inspection Number of production runs 40 runs
Engineering Engineering change orders 100 change orders
Plant related costs Square footage of space 1,920 sq ft.
You have gathered some further information about the two products :
Each FRED requires 4 machine hours, whereas each MARTHA requires 1 machine hour
The FRED is manufactured in production runs of 50 units each .Each MARTHA is manufactured in 250 unit batch
Three quarter of the engineering activity ,in terms of change orders ,is related to FREDs
The plant has 1,920 square feet of space, 80 per cent of which is used in the production of FREDs
Required:
(a) Calculate the cost per unit for FREDs and MARTHAs using the conventional approach when calculating overhead
(b) Calculate the cost per activity for each activitycost pool
(c) Calculate the product cost per unit for FREDs and MARTHAs using Activity Based Costing.
(d) Using the same pricing approach as above(120% of total manufacturing cost) calculate the price that would be charged for FREDs and MARTHAs using Activity Based costing.
(e) Based on your calculations using Activity Based costing explain how the conventional volume based approach to allocating overhead has lead to mispricing the products.
(f) What are the benefits that would come from introducing Activity Based costing(ABC)?
(g) Are there any disadvantages from using ABC?