ong Kong, SAR, China, manufactures tablets, laptops and desktop PCs. Wongtien currently operates a standard absorption costing system. Budgeted information for next year is given below (currency in one thousa
- Wongtien Electronics Corp. in Hong Kong, SAR, China, manufactures tablets, laptops and desktop PCs. Wongtien currently operates a
standard absorption costing system. Budgeted information for next year is given below (currency in one thousand Hong Kong Dollars, HK$000):
Products Tablets Laptops Desktop PCs Total
Sales revenue 3,640 12,480 9,880 26,000
Direct material 800 2,800 2,200 5,800
Direct labor 300 1,200 800 2,300
Fixed production
overheads 1,456 4,992 3,952 10,400
Gross profit 1,084 3,488 2,928 7,500
Fixed production overheads are currently absorbed based on a percentage of sales revenue. Wongtien is considering changing to an activity-based costing system. The main activities and their associated cost drivers and overhead cost have been identified as follows:
Activity Cost driver Production overhead cost
Manufacturing scheduling Number of orders 162
Parts handling Number of parts 2,464
Assembly Assembly time 4,472
Software installation and Number of software
testing applications 2,000
Packaging Number of units 1,302
10,400
Further details have also been ascertained as follows:
Tablets Laptops Desktop PCs
Budgeted production for next year (units) 10,000 12,000 6,000
Average number of units per order 10 6 4
Number of parts per unit 20 35 25
Assembly time per unit (minutes) 20 40 30
Number of software applications per unit. 2 3 4
Instructions
- Calculate the total gross profit for each product using the proposed activity-based costing system. (25%)
- Discuss the differences between the gross profit figures calculated in part 1 compared with those calculated under the current absorption costing system. (15%)
- Explain how the information obtained from the activity-based costing system could be used for cost management purposes. (10%)
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Solved in 3 steps
