Assignment:
Traditional and activity-based budget statements and life-cycle costing
The budget for the Production, Planning and Development Department of Obba plc, is currently prepared as part of a traditional budgetary planning and control system. The analysis of costs by expense type for the period ended 30 November 2000 where this system is in use is as follows:
|
Expense type
|
Budget %
|
Actual %
|
|
Salaries
|
60
|
63
|
|
Supplies
|
6
|
5
|
|
Travel cost
|
12
|
12
|
|
Technology cost
|
10
|
7
|
|
Occupancy cost
|
12
|
13
|
The total budget and actual costs for the department for the period ended 30 November 2000 are El 000 000 and El 060 000 respectively.
The company now feels that an Activity Based Budgeting approach should be used. A number of activities have been identified for the Production, Planning and Development Department. An investigation has indicated that total budget and actual costs should be attributed to the activities on the following basis:
|
|
Budget
|
Actual
|
|
|
%
|
%
|
|
Activities
|
|
|
|
1. Routing/scheduling - new
|
20
|
16
|
|
products
|
|
|
|
2. Routing/scheduling - existing
|
40
|
34
|
|
products
|
|
|
|
3. Remedial re-routing/scheduling
|
5
|
12
|
|
4. Special studies - specific orders
|
10
|
8
|
|
5. Training
|
10
|
15
|
|
6. Management & administration
|
15
|
15
|
Required:
(a) (i) Prepare two budget control statements for the Production Planning and Development Department for the period ended 30 November 2000 which compare budget with actual cost and show variances using
1. a traditional expense based analysis and
2. an activity based analysis.
(ii) Identify and comment on four advantages claimed for the use of Activity Based Budgeting over traditional budgeting using the Production Planning and Development example to illustrate your answer.
(iii) Comment on the use of the information provided in the activity based statement which you prepared in (i) in activity based performance measurement and suggest additional information which would assist in such performance measurement.
(b) Other activities have been identified and the budget quantified for the three months ended 31 March 2001 as follows:
|
|
Cost Driver
|
Units of
|
|
|
Activities
|
Unit basis Cost Driver
|
Cost
|
Activities
|
|
|
|
|
(£000)
|
|
Product
|
design hours
|
8 000
|
2000
|
|
design
|
|
|
|
|
Purchasing purchase orders
|
4 000
|
200
|
|
|
Production machine hours
|
12 000
|
1500
|
|
|
|
|
|
|
|
Packing
|
volume (cu.m.)
|
20 000
|
400
|
|
Distribution weight (kg)
|
120 000
|
600
|
|
New product NPD is included in the above budget. The following additional information applies to NPD:
(i) Estimated total output over the product life cycle: 5000 units (4 years life cycle).
(ii) Product design requirement: 400 design hours
(iii) Output in quarter ended 31 March 2001: 250 units
(iv) Equivalent batch size per purchase order: 50 units
(v) Other product unit data: production time 0.75 machine hours: volume 0.4 cu. metres; weight 3 kg.
Required:
Prepare a unit overhead cost for product NPD using an activity based approach which includes an appropriate share of life cycle costs using the information provided in (b) above.