Mark Benny started MM LTD, a niche furniture brand, 10 years ago. he ran the business as a sole proprietorship. While he has 50 skilled carpenters and 5 sales people on his payroll, he has been taking care of the accounting by himself. Now, he intends to offer 40% of the ownership to public in next couple years and is willing to make changes and has hired George as a management accountant to organize and improve the accounting systems. MM LTD's total budgeted manufacturing overheads cost for the current year is Ugx 111,240,000 and budgeted total labor hours are 20,000. Jemba Fred the financial accountant has been applying traditional costing method during the whole 10 years period. MM LTD's sofas includes the 2-set, 3-set and 6-set options. State House recently placed an order for 150 units of the 6-set type. The order is expected to be delivered in one-month time. Since it is a customized order, State House will be billed at cost plus 25%. George is not a fan of traditional costing system. He believes that the benefits of activity-based costing system exceeds its costs, so George has sat down with Ronnie Bash, the chief engineer, to identify the activities which the firm undertakes in its sofa division. Next, George calculated the total cost that goes into each activity, identified the cost driver that is most relevant to each activity and calculated the activity rates. The results are summarized below: Activity Amount (Ugx) Relevant Cost Driver Activity level Production of components 20,310,000 Machine hours 25,000 Assembly of components 15,200,000 Number of labor hours 20,000 Packaging 2,130,000 Units 5,000 Shipping 6,000,000 Units 5,000 Setup costs 3,4000,000 Number of setups 240 Designing 1,200,000 Designer hours 1,000 Product testing 2,400,000 Testing hours 500 Once the order was ready for packaging, Jemba Fred gave you a summary of total cost incurred, and a statement of activities performed (also called the bill of activities) as shown below: Order No: 1502021 Customer: State House Units: 150 Type: 6 Set Cost of direct materials Ugx 15,000,000 Cost of purchased components Ugx 13,500,000 Labor cost Ugx 11,560,000 Activity Relevant Cost Driver Activity Usage Production of components Machine hours 320 Assembly of components Number of labor hours 250 Packaging Units 150 Shipping Units 150 Setup costs Number of setups 15 Designing Designer hours 70 Product testing Testing hours 22 Required: Help management of MM LTD to calculate the total costs using activity-based costing. Why would George prefer Activity-based costing rather than the Traditional costing method
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Mark Benny started MM LTD, a niche furniture brand, 10 years ago. he ran the business as a sole proprietorship. While he has 50 skilled carpenters and 5 sales people on his payroll, he has been taking care of the accounting by himself. Now, he intends to offer 40% of the ownership to public in next couple years and is willing to make changes and has hired George as a
MM LTD's total budgeted
MM LTD's sofas includes the 2-set, 3-set and 6-set options. State House recently placed an order for 150 units of the 6-set type. The order is expected to be delivered in one-month time. Since it is a customized order, State House will be billed at cost plus 25%.
George is not a fan of traditional costing system. He believes that the benefits of activity-based costing system exceeds its costs, so George has sat down with Ronnie Bash, the chief engineer, to identify the activities which the firm undertakes in its sofa division.
Next, George calculated the total cost that goes into each activity, identified the cost driver that is most relevant to each activity and calculated the activity rates.
The results are summarized below:
|
Activity |
Amount (Ugx) |
Relevant Cost Driver |
Activity level |
|
Production of components |
20,310,000 |
Machine hours |
25,000 |
|
Assembly of components |
15,200,000 |
Number of labor hours |
20,000 |
|
Packaging |
2,130,000 |
Units |
5,000 |
|
Shipping |
6,000,000 |
Units |
5,000 |
|
Setup costs |
3,4000,000 |
Number of setups |
240 |
|
Designing |
1,200,000 |
Designer hours |
1,000 |
|
Product testing |
2,400,000 |
Testing hours |
500 |
Once the order was ready for packaging, Jemba Fred gave you a summary of total cost incurred, and a statement of activities performed (also called the bill of activities) as shown below:
|
Order No: 1502021 Customer: State House Units: 150 Type: 6 Set |
||
|
Cost of direct materials |
Ugx 15,000,000 |
|
|
Cost of purchased components |
Ugx 13,500,000 |
|
|
Labor cost |
Ugx 11,560,000 |
|
|
|
|
|
|
Activity |
Relevant Cost Driver |
Activity Usage |
|
Production of components |
Machine hours |
320 |
|
Assembly of components |
Number of labor hours |
250 |
|
Packaging |
Units |
150 |
|
Shipping |
Units |
150 |
|
Setup costs |
Number of setups |
15 |
|
Designing |
Designer hours |
70 |
|
Product testing |
Testing hours |
22 |
Required:
Help management of MM LTD to calculate the total costs using activity-based costing.
Why would George prefer Activity-based costing rather than the Traditional costing method
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