Frantic Plc assembles three types of motorcycle at the same factory: the 50cc Sunshine; the 250cc Roadster and the 1000cc Fireball. It sells the motorcycles throughout the world. In response to market pressures Frantic Plc has invested heavily in new manufacturing technology in recent years and, as a result, has signifi
Frantic Plc assembles three types of motorcycle at the same factory: the 50cc Sunshine; the 250cc Roadster and the 1000cc Fireball. It sells the motorcycles throughout the world.
In response to market pressures Frantic Plc has invested heavily in new manufacturing technology in recent years and, as a result, has significantly reduced the size of its workforce.
Historically, the company has allocated all overhead costs using total direct labour hours but is now considering introducing Activity Based Costing (ABC). Frantic Plc’s accountant has produced the following analysis.
At the board meeting there was some concern over the introduction of activity-based costing.
The finance director argued:’ I very much doubt whether selling the Fireball is viable but I am not convinced that activity-based costing would tell us any more than the use of labour hours in assessing the viability of each product.’
The managing director argued:’ I believe that activity-based costing would be an improvement, but it still has its problems. For instance, if we carry out and activity many times surely, we get better at it and costs fall rather than maintain constant. Similarly, some costs are fixed and do not vary either with labour hours or any other cost driver.’
The chairman argued:’ I cannot see the problem. The overall profit for the company is the same no matter which method of allocating
- Write a report to the directors of Frantic Plc, as its
management accountant. The report should:
- A. Evaluate the labour hours and the activity-based costing methods in the circumstances of Frantic Plc; and [Maximum Word Count 750 Words]
- B. Examine the implications of activity-based costing for Frantic Plc, and in so doing evaluate the issues raised by each of the directors. [Maximum Word Count 750 Words]
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