Calculate the product costs using a traditional volume

Question

This assignment will assess the following learning outcomes:

Analyse costs in business organisations contexts

Apply cost estimation techniques in a range of business situations

Evaluate cost and revenue information and costing methods for managerial decision-making

Effectively communicate cost and revenue information in a decision making context.

Question 1:

ALFIRDOS LTD provides the details of the costs, volume and cost drivers for the three products A, B and C for the year 2015:

	A	B	C		Total
Production and sales (Units)	30,000	20,000	8,000
Raw material usage (quantity)	5	5	11
Direct material costs (per unit)	25	20	11		1238,000
Direct labour hours	1 1/3	2	1		88,000
Machine hours	1 1/3	1	2		76,000
Direct labour cost (per unit)	8	12	6
Number of production runs	3	7	20		30
, Number of deliveries	9	3	20		32
i Number of receipts	15	35	220		270
Number of production orders	15	10	25		50

The overhead costs are as follows:

Set up costs	30000 OMR
Machines Overheads	760000 OMR
Receiving costs	435000 OMR
Packing costs	250000 OMR
Engineering costs	373000 OMR
	1848000 OMR

The cost drivers for overhead costs are as follows:

Set up costs	Number of production runs
Machines Overheads	Number of machine hours
Receiving costs	Number of receipts
Packing costs	Number of deliveries
Engineering costs	Number of production orders
Total

The company used to allocate overheads to products based on direct labour hours. However, the management noticed that the majority of overheads are more closely related to machine hours than direct labour hours.

Recently, they decided to redesign the cost system by recovering overheads using two volume related bases: machine hours and a materials handling overhead rate of the receiving department. But both current and previous cost system reported low profit margins for product A, which is the company's highest selling product.

After appointing Mr. Khalil as a cost manager, he drew the attention of the management to the benefits of the use of Activity Based Costing and Mr. Khalil suggested analysing the overheads of the last period by the major activities in order to compute activity based costs.

(a) Calculate the product costs using a traditional volume related costing system based on the following assumptions:

All overheads are apportioned on the basis of direct labour hours (former costing system)

The overheads of the receiving department are apportioned based on materials handling overhead rate and the remaining overheads are recovered using a machine hour rate. (Current costing system).

(b) Calculate the product costs using activity based costing suggested by Mr Khalil.

(c) Analyse and critically evaluate the differences reported between the product costs in (a) and (b)

Question 2:

KERALA Ltd Is a company manufacturing filing cabinets at customers specific requests without carrying any stock of readymade cabinets. The only stocks held in the stores are raw materials from which the cabinets are produced.

In KERALA Ltd, there are two production departments: Cutting and Assembly. There are also two service departments the Stores and the Canteen. All departments are located in the same building.

The information provided below shows the company's budget for the financial year 2015.

Overhead budget for financial year 2015.

Overhead		OMR
Factory premises rent (including service departments)		440,000
Factory premises insurance (including service departments)		22,000
Sundry expenses (Cutting department)		17,080
Sundry expenses (Assembly department)		8,300
Plant and machinery insurance		7,800
Depreciation of factory plant and machinery		48,000
Assembly department material		20,00
Indirect labour (including service departments)		352,000
Administration salaries		48,000
Sundry Stores costs		26,740
Canteen costs		59,280
Total		1049,200

The administration salaries will be apportioned equally to the cutting department, assembly department, and the stores department.

The following Information is also provided:

Department	Floor Area Sq meters	Indirect labour	Direct labour	Value of plant and machinery OMR
Cutting	I         100,000	12 employees	48 employees	220,000
Assembly	100,000	12 employees	80 employees	50,000
Stores	10,000	4 employees	4 employees	10,000
Canteen	10,000	4 employees	6 employees	20,000

Service centre costs are apportioned as follows:

Department	Basis
Canteen	Total number of employees
Stores	70% for the cutting department and 30% for the assembly department

Kerala Ltd has also budgeted for the following levels of activity for the year 2015:

Department	Labour hours	Machine hours
Canteen	2900	4700
Stores	4200	680

Based on the previous infromation you are required to:

(a) Prepare the overhead analysis sheet for Kerala Ltd for the year 2015.

(b) Using appropriate bases, secondary apportion the service department costs to the production department,

(c) Calculate appropriate overhead absorption rates for the production departments. Justify the choice of cost unit.

(d) Using the rates calculated in question (c) above, estimate the amount of overhead to be charged to batch BB125 that would require the following labour and machine hours:

The actual overhead cost of Batch BB125 is 10000 OMR.

(i) Calculate and compare the budgeted cost and the real cost of Batch BB125.

(ii) Analyse the causes of the under/over absorption shown in your answer to (i) above.

Question 3:

On the next page, you will find a testimony of Leon Van Schalkwayk, a Strategic finance executive at Impala Platinum, discussing the importance of management accounting and costing methods in the company.

Based on this testimony, your background in the module and on other academic references (books and articles: bibliography is required, a minimum of 15 references), you are required to:

(a) Highlight the importance of management accounting in a company, compared to financial accounting.

(b) Explain how, according to you as an accounts manager, Impala Platinium was able to reduce costs and drive those costs 20% lower than competitors.

(c) As a management accountant, suggest, explain and critically evaluate a managerial accounting method that will assess the effects of volume changes on a firm's costs, revenues, and profit.

(d) Explain how, using different costing methods, management accounting can show different profit levels for the same year.