Teja Sdn Bhd (TSB) produces two types of hiking gloves: premium and standard. The company uses direct labour hours as a basis to calculate plantwide overhead rate. Total overhead cost for the company is RM637,000. The breakdown of the overhead cost by activities is shown below: Activity Setting up equipment Activity Cost RM175,000 Machining RM154,000 Production scheduling RM73,500 Inspecting products RM101,500 Moving materials RM133,000 The cost drivers for the activity are production runs, number of moves, inspection hours, number of
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Teja Sdn Bhd (TSB) produces two types of hiking gloves: premium and standard. The company uses direct labour hours as a basis to calculate plantwide
Total overhead cost for the company is RM637,000. The breakdown of the overhead cost by activities is shown below:
|
Activity Setting up equipment |
Activity Cost RM175,000 |
|
Machining |
RM154,000 |
|
Production scheduling |
RM73,500 |
|
Inspecting products |
RM101,500 |
|
Moving materials |
RM133,000 |
The cost drivers for the activity are production runs, number of moves, inspection hours, number of setups, and machine hour.
The production data for the company is as follows:
|
Units produced |
Premium 21,000 |
Standard 119,000 |
|
Direct materials |
RM189,875 |
RM665,525 |
|
Direct labour |
RM33,600 |
RM112,000 |
|
Direct labour hours |
24,500 |
115,500 |
|
Number of setups |
42 |
98 |
|
Machine hours |
2,800 |
4,900 |
|
Production runs |
84 |
210 |
|
Inspection hours |
350 |
1,680 |
|
Number of moves |
125 |
225 |
REQUIRED:
- Calculate the unit cost of premium and standard gloves based on plantwide overhead rate.
- Calculate the unit cost of premium and standard gloves if TSB allocates overhead costs using Activity-Based Costing (ABC) system.
- Explain why traditional costing is less superior than ABC in allocating overhead cost.
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