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. Discuss the differences between the gross profit figures calculated in part 1 compared with those calculated under the current absorption costing system. Explain how the information obtained from the activity-based costing system could be used for cost management purposes.
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.
- 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-
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.
- Discuss the differences between the gross profit figures calculated in part 1 compared with those calculated under the current absorption costing system.
- Explain how the information obtained from the activity-based costing system could be used for cost management purposes.
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