ABC Ltd manufactures two products: Basic and Deluxe. The company expects to produce and sell 1,100 units of Basic and 1,600 units of Deluxe during the current year. Currently in the traditional costing system, the company has been using direct labour hours as the single cost driver for allocation of manufacturing overheads to products. The budgeted manufacturing overheads for the next period are $35,000. The company is considering to implement the activity-based costing (ABC) system. The accountant has analysed the budgeted production overheads and identified various costs in activity centres with appropriate cost drivers: Activity Centre Costs Cost Driver Maintenance costs $7,000 Direct labour hours Set up costs $12,000 Number of production run Quality inspections $7,020 Number of inspections Stores receiving $3,480 Number of component deliveries Stores issues $5,500 Number of issues $35,000 The analysis also revealed the following information: Basic Deluxe Direct materials cost per unit Direct labour cost per unit $50 $30 $35 $45 Direct labour hours per unit 2 3 Number of production run 10 40 Number of inspections 20 80 Number of component deliveries 492 900 Number of issues from stores 400 7,000 Required: (a) Using the traditional costing system, determine the predetermined overhead rate and calculate the total manufacturing costs for the two products. (b) Using the activity-based costing system, determine the activity cost driver rate for each activity and calculate the total manufacturing costs for the two products
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
ABC Ltd manufactures two products: Basic and Deluxe. The company expects to produce and
sell 1,100 units of Basic and 1,600 units of Deluxe during the current year.
Currently in the traditional costing system, the company has been using direct labour hours as
the single cost driver for allocation of manufacturing
manufacturing overheads for the next period are $35,000.
The company is considering to implement the activity-based costing (ABC) system. The
accountant has analysed the budgeted production overheads and identified various costs in
activity centres with appropriate cost drivers:
Activity Centre Costs Cost Driver
Maintenance costs $7,000 Direct labour hours
Set up costs $12,000 Number of production run
Quality inspections $7,020 Number of inspections
Stores receiving $3,480 Number of component deliveries
Stores issues $5,500 Number of issues
$35,000
The analysis also revealed the following information:
Basic Deluxe
Direct materials cost per unit
Direct labour cost per unit
$50
$30
$35
$45
Direct labour hours per unit 2 3
Number of production run 10 40
Number of inspections 20 80
Number of component deliveries 492 900
Number of issues from stores 400 7,000
Required:
(a) Using the traditional costing system, determine the predetermined overhead rate and
calculate the total
(b) Using the activity-based costing system, determine the activity cost driver rate for each
activity and calculate the total manufacturing costs for the two products
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