Using a traditional, volume-based overhead rate, determine the overhead cost per unit of the Regular and Special units. b. Using the information provided by Kashif. Determine the overhead cost per unit of the Regular and Special units using an activity-based costing system. c. What is the total per unit cost of the Regular and Special units under each overhead costing systems.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
.a. Millat manufacturing produces two product models: Regular and Special. The following
information was taken from the accounting records for the first quarter of 2020.
Regular Special Total
Units produced 80,000 20,000 100,000
Material cost Rs. 320,000 Rs. 180,000 Rs. 500,000
Labor cost Rs. 480,000 Rs. 140,000 Rs. 620,000
Millat currently uses a traditional cost accounting system where total
products based on the total number of units produced. Company president Michael has approached the
controller Kashif, with concerns about sagging profit margins and his inability to explain competitors’
pricing of similar products. Kashif suggest that the company explore the possibility of a costing system
that is based less on volume and more on identifying the consumption of resources by products. Kashif
identifies the following overhead costs related to the production process:
Wages and costs related to machine setups Rs. 360,000
Material handling costs 480,000
Quality control costs 120,000
Other overhead costs related to units produced 240,000
Total Rs. 1,200,000
During the quarter , there were 40 machine setups for production: 20 from Special to Regular and 20
from Regular to Special. Kashif believes that the number of setups is the most appropriate cost driver of
machine setups costs. With regard to material handling, the Special model uses more expensive and
difficult- to – handle materials. Kashif believes that material cost is the primary indicator of material
handling costs. Each unit is hand- inspected by quality control personnel. Special units require a more
time consuming inspection because they are more complex and have more parts than Regular units.
Quality control inspectors are paid Rs. 40 per hour; examination of payroll time sheets indicates that the
inspectors spent 50 percent more hours inspecting Special units than Regular units. Kashif believes that
the remaining 30 percent of overhead costs are related to the number of units produced.
Required:
a. Using a traditional, volume-based overhead rate, determine the overhead cost per unit of the
Regular and Special units.
b. Using the information provided by Kashif. Determine the overhead cost per unit of the Regular
and Special units using an activity-based costing system.
c. What is the total per unit cost of the Regular and Special units under each overhead costing
systems.
d. Compute the amount of product cross- subsidization per unit that was taking place under the
traditional costing system.
e. Identify potential non-value added activities in Millat.
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