Company A uses a traditional system in costing its products. Using this system, the company allocates all indirect production costs to products in proportion to their direct labour costs. However, recently the company has been contemplating in switching to an Activity-Based Costing (ABC) system. wwwMA Three products are produced: X, Y and Z. Direct costs, indirect costs and cost-driver activity for each product for a recent month are as follows: X Y Z Direct-materials cost Direct-labour cost Kilowatt hours RM20,000 RM.4.000 50,000 RM45,000 RM120,000 RM 1,000 RM 3,000 200,000 wwwwww 150,000 Number of inspections 13 5 2 Indirect production cost RM10,000 RM20,000 RM20,000 RM50,000 Cost Driver Activity Materials handling Quality inspection Electricity energy Total indirect production costs Direct-materials cost Number of inspections Kilowatt hours Required: (a) Compute the total indirect production cost allocated to X, Y and Z using the current traditional costing system. (b) Compute the total indirect production cost allocated to X, Y and Z using the ABC system. (c) Discuss briefly the problems associated with the traditional system in relation to product costing? Are these problems also linked to the ABC system? Briefly explain.
Company A uses a traditional system in costing its products. Using this system, the company allocates all indirect production costs to products in proportion to their direct labour costs. However, recently the company has been contemplating in switching to an Activity-Based Costing (ABC) system. wwwMA Three products are produced: X, Y and Z. Direct costs, indirect costs and cost-driver activity for each product for a recent month are as follows: X Y Z Direct-materials cost Direct-labour cost Kilowatt hours RM20,000 RM.4.000 50,000 RM45,000 RM120,000 RM 1,000 RM 3,000 200,000 wwwwww 150,000 Number of inspections 13 5 2 Indirect production cost RM10,000 RM20,000 RM20,000 RM50,000 Cost Driver Activity Materials handling Quality inspection Electricity energy Total indirect production costs Direct-materials cost Number of inspections Kilowatt hours Required: (a) Compute the total indirect production cost allocated to X, Y and Z using the current traditional costing system. (b) Compute the total indirect production cost allocated to X, Y and Z using the ABC system. (c) Discuss briefly the problems associated with the traditional system in relation to product costing? Are these problems also linked to the ABC system? Briefly explain.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Company A uses a traditional system in costing its products. Using this system, the
company allocates all indirect production costs to products in proportion to their direct
labour costs. However, recently the company has been contemplating in switching to an
Activity-Based Costing (ABC) system.
www
Three products are produced: X, Y and Z. Direct costs, indirect costs and cost-driver
activity for each product for a recent month are as follows:
Y
Z
Direct-materials cost
RM20,000
RM 4.000
50,000
RM45,000 RM120,000
RM 1,000 RM 3,000
150,000
Direct-labour cost
Vo ww
Kilowatt hours
200,000
Number of inspections
13
5
Cost Driver
Activity
Materials handling
Quality inspection
Electricity energy
Total indirect production costs
Indirect production cost
RM10,000
RM20,000
RM20,000
RM50,000
Direct-materials cost
Number of inspections
Kilowatt hours
Required:
(a) Compute the total indirect production cost allocated to X, Y and Z using the current
traditional costing system.
(b) Compute the total indirect production cost allocated to X, Y and Z using the ABC
system.
(c) Discuss briefly the problems associated with the traditional system in relation to
product costing? Are these problems also linked to the ABC system? Briefly explain.
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