KAM Limited manufactures two type of machine: Agro and Farm. The weekly production is 1,500 units of Agro and 1,000 units of Farm. The products are made in batches, before a batch can be made the production machinery must be set-up, checked for accuracy. Each batch produced has quality inspection to ensure that it is of the required standard. The following are the details of each product: Agro 500 units Farm 250 units Units produced in one batch Selling price per unit Direct materials per unit Direct labour per unit (one hour per unit) £200 £160 £60 £40 £20 £20 The following are the fixed production costs each week: Set-up costs of machinery Quality inspection costs of production £28,000 £14,000 Currently the company uses absorption costing. Fixed production costs are attributed to output on the basis of direct labour hours. The management is considering activity-based costing approach. You are required to: a) Calculate the overheads attributed to Agro and Farm each week through absorption (full) costing, on the basis of direct labour hours. Show your calculation process. b) Calculate the overheads attributed to Agro and Farm each week through Activity- based Costing with the cost divers of set-up and quality inspection. Show your calculation process. c) Prepare brief income statements to show how absorption costing and activity- based costing will deal differently with the costs. d) Advise the management of KAM Limited which is the more appropriate method of charging overheads to output.
KAM Limited manufactures two type of machine: Agro and Farm. The weekly production is 1,500 units of Agro and 1,000 units of Farm. The products are made in batches, before a batch can be made the production machinery must be set-up, checked for accuracy. Each batch produced has quality inspection to ensure that it is of the required standard. The following are the details of each product: Agro 500 units Farm 250 units Units produced in one batch Selling price per unit Direct materials per unit Direct labour per unit (one hour per unit) £200 £160 £60 £40 £20 £20 The following are the fixed production costs each week: Set-up costs of machinery Quality inspection costs of production £28,000 £14,000 Currently the company uses absorption costing. Fixed production costs are attributed to output on the basis of direct labour hours. The management is considering activity-based costing approach. You are required to: a) Calculate the overheads attributed to Agro and Farm each week through absorption (full) costing, on the basis of direct labour hours. Show your calculation process. b) Calculate the overheads attributed to Agro and Farm each week through Activity- based Costing with the cost divers of set-up and quality inspection. Show your calculation process. c) Prepare brief income statements to show how absorption costing and activity- based costing will deal differently with the costs. d) Advise the management of KAM Limited which is the more appropriate method of charging overheads to output.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:KAM Limited manufactures two type of machine: Agro and Farm. The weekly
production is 1,500 units of Agro and 1,000 units of Farm.
The products are made in batches, before a batch can be made the production
machinery must be set-up, checked for accuracy. Each batch produced has quality
inspection to ensure that it is of the required standard.
The following are the details of each product:
Agro
500 units
Farm
250 units
Units produced in one batch
Selling price per unit
Direct materials per unit
Direct labour per unit (one hour per unit)
£200
£160
£60
£40
£20
£20
+
The following are the fixed production costs each week:
Set-up costs of machinery
Quality inspection costs of production
£28,000
£14,000
Currently the company uses absorption costing. Fixed production costs are attributed
to output on the basis of direct labour hours.
The management is considering activity-based costing approach.
You are required to:
a) Calculate the overheads attributed to Agro and Farm each week through
absorption (fulI) costing, on the basis of direct labour hours. Show your calculation
process.
b) Calculate the overheads attributed to Agro and Farm each week through Activity-
based Costing with the cost divers of set-up and quality inspection. Show your
calculation process.
c) Prepare brief income statements to show how absorption costing and activity-
based costing will deal differently with the costs.
d) Advise the management of KAM Limited which is the more appropriate method of
charging overheads to output.
+
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