10 10 Puncak Bhd manufactures two models of shoes called CUTE and SWEET. The SWEET model has been in the market for many years. Due to the demands in the current fashion trend, the company introduced a new model called CUTE. Since the introduction of the CUTE model, the company's profits however, have been steadily declining in spite of increasing sales of CUTE. The management of Puncak Bhd is worried and asks the cost accountant to do an analysis on this problem. The cost accountant has identified that currently the company is using direct labour hours to absorb manufacturing overheads. He prefers to adopt the activity-based costing (ABC) approach. The following data relate to the two models for the current period: 122 Management Accounting Volume (units) Selling price per unit (RM) 175 Direct materials cost per unit (RM) 112 Direct labour cost per unit (RM) 8 Direct labour hours per unit (hours) 1.6 0.8 Total manufacturing overheads for the period are RM6,000,000. This total can be broken down as follows: Manufacturing overheads Purchasing Rework Product testing Machine related costs. Activity measures CUTE 6,000 CUTE 400 500 15,000 350 154 20,000 16 The cost accountant has also gathered the following additional information to implement ABC system. RM 252,000 648,000 1,350,000 3,750,000 SWEET Expected activity SWEET 9,000 800 400 120,000 Number of tests Number of purchase orders Number of rework orders Machine hours c. Compare your answers in (a) and (b) above and comment on your findings. Include in your answer the possible reasons why the use of a single cost driver can distort the product costs. 30,000 Total 15,000 1,200 900 50,000 d. Why do you think the company's profits have steadily declined even though the sales of CUTE have been increasing rapidly?
10 10 Puncak Bhd manufactures two models of shoes called CUTE and SWEET. The SWEET model has been in the market for many years. Due to the demands in the current fashion trend, the company introduced a new model called CUTE. Since the introduction of the CUTE model, the company's profits however, have been steadily declining in spite of increasing sales of CUTE. The management of Puncak Bhd is worried and asks the cost accountant to do an analysis on this problem. The cost accountant has identified that currently the company is using direct labour hours to absorb manufacturing overheads. He prefers to adopt the activity-based costing (ABC) approach. The following data relate to the two models for the current period: 122 Management Accounting Volume (units) Selling price per unit (RM) 175 Direct materials cost per unit (RM) 112 Direct labour cost per unit (RM) 8 Direct labour hours per unit (hours) 1.6 0.8 Total manufacturing overheads for the period are RM6,000,000. This total can be broken down as follows: Manufacturing overheads Purchasing Rework Product testing Machine related costs. Activity measures CUTE 6,000 CUTE 400 500 15,000 350 154 20,000 16 The cost accountant has also gathered the following additional information to implement ABC system. RM 252,000 648,000 1,350,000 3,750,000 SWEET Expected activity SWEET 9,000 800 400 120,000 Number of tests Number of purchase orders Number of rework orders Machine hours c. Compare your answers in (a) and (b) above and comment on your findings. Include in your answer the possible reasons why the use of a single cost driver can distort the product costs. 30,000 Total 15,000 1,200 900 50,000 d. Why do you think the company's profits have steadily declined even though the sales of CUTE have been increasing rapidly?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Please provide an answer for C and D
Transcribed Image Text:10 Puncak Bhd manufactures two models of shoes called CUTE and SWEET. The SWEET model
has been in the market for many years. Due to the demands in the current fashion trend, the
company introduced a new model called CUTE. Since the introduction of the CUTE model,
the company's profits however, have been steadily declining in spite of increasing sales of
CUTE. The management of Puncak Bhd is worried and asks the cost accountant to do an
analysis on this problem. The cost accountant has identified that currently the company
is using direct labour hours to absorb manufacturing overheads. He prefers to adopt the
activity-based costing (ABC) approach. The following data relate to the two models for the
current period:
CUTE
SWEET
Volume (units)
15,000
120,000
Selling price per unit (RM)
350
175
Direct materials cost per unit (RM)
154
112
Direct labour cost per unit (RM)
16
8.
Direct labour hours per unit (hours)
1.6
0.8
Total manufacturing overheads for the period are RM6,000,000. This total can be broken
down as follows:
Manufacturing overheads
RM
Purchasing
252,000
Rework
648,000
Product testing
1,350,000
Machine related costs
3,750,000
122
Management Accounting
ABC system.
Expected activity
Total
SWEET
Activity measures
CUTE
15,000
9,000
6,000
Number of tests
1,200
800
400
Number of purchase orders
900
400
500
Number of rework orders
30,000
50,000
Machine hours
20,000
c. Compare your answers in (a) and (b) above and comment on your findings. Include in
your answer the possible reasons why the use of a single cost driver can distort the
product costs.
d. Why do you think the company's profits have steadily declined even though the sales of
CUTE have been increasing rapidly?
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VIEWStep 6: Product cost per unit as per ABC
VIEWStep 7: c. Comparision between Traditional costing and ABC Method
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