New Tyre Limited produces two types of tyres: standard and deluxe. It uses an activity-based costing (ABC) system and has three activity cost pools – machining, set-up, and packaging. The company’s overhead costs have been allocated to these cost pools as follows: Activity Cost Pools Machining ($) Set-up ($) Packaging ($) Total ($) 126,000 36,000 78,000 240,000 Costs in the Machining cost pool are allocated to products based on machine-hours; costs in the Set-up cost pool are allocated to products based on the number of batches; costs in the Packaging cost pool are allocated to products based on the number of shipments made. More information about the company’s products and costs are as follows: Product Machine hours Batches Shipments Sales ($) Direct materials ($) Direct labour ($) Standard 6,000 500 200 700,000 300,000 90,000 Deluxe 4,000 1,500 400 400,000 150,000 90,000 Total 10,000 2,000 600 1,100,000 450,000 180,000 Required (show your calculations): Determine the profit margins for each product using activity-based costing.
New Tyre Limited produces two types of tyres: standard and deluxe. It uses an activity-based costing (ABC) system and has three activity cost pools – machining, set-up, and packaging. The company’s overhead costs have been allocated to these cost pools as follows:
|
Activity Cost Pools |
|
||
|
Machining ($) |
Set-up ($) |
Packaging ($) |
Total ($) |
|
126,000 |
36,000 |
78,000 |
240,000 |
Costs in the Machining cost pool are allocated to products based on machine-hours; costs in the Set-up cost pool are allocated to products based on the number of batches; costs in the Packaging cost pool are allocated to products based on the number of shipments made.
More information about the company’s products and costs are as follows:
|
Product |
Machine hours |
Batches |
Shipments |
Sales ($) |
Direct materials ($) |
Direct labour ($) |
|
Standard |
6,000 |
500 |
200 |
700,000 |
300,000 |
90,000 |
|
Deluxe |
4,000 |
1,500 |
400 |
400,000 |
150,000 |
90,000 |
|
Total |
10,000 |
2,000 |
600 |
1,100,000 |
450,000 |
180,000 |
Required (show your calculations):
- Determine the profit margins for each product using activity-based costing.
|
Type in answers to Question 1. a. (expand the space as needed)
|
- In a company meeting, the CFO commented that the design and implementation of an activity-based costing system is a costly endeavour. Many companies, especially those having limited resources, may not afford to run both traditional costing systems and activity-based costing systems. Then, the Marketing Director said that for companies with limited resources, a good option would be to replace their traditional costing system with an activity-based costing system. Do you agree or disagree with the Marketing Director? Explain your answers. [Maximum word limit: 250 words)
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