Question

QUESTION (25 MARKS) Maju Limbat Sdn. Bhd. has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHS). The company has two products, MXN and TXW, about which it has provided the following data: MENN TXW Direct materials per unit RM10.40 RM45.20 Direct labor per unit RM10 RM23.10 Direct labor-hours per unit 0.10 hours 2.10 hours Annual production (units) 35,000 15.000 The company's estimated total manufacturing overhead for the year is RM1,155,000 and the company's estimated total direct labor-hours for the year is 35,000 hours The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below: Activity Cost Pool Assembling products (DLHs) Preparing batches (batches) Axial milling Machine Hours) Total Fstimated Overhead Cost RM 140,000 RM 241,150 RM 766,500 RMI. 147.650 Expected Activity MXN TXW Total 3,500 31,500 35,000 560 1,295 1.855 1,540 1,015 2,555 Required: a) Compute the predetermined overhead rate under the traditional costing method. (3 marks) (CLO3:PLO2:03) b) Determine the unit product cost of product MXN and TXW for the current year. (5 marks) (CLO3:PLO2:C3) :) Determine the unit product cost each of product MXN and TXW under activity-based costing system. (14 marks) (CLO3:PLO2:03) Discuss the fundamental difference of activity-based costing from the traditional costing method. (3 marks) (CLO3:PLO2:C4) "T 1201/Sept/Oct2019 Page 4 of 6

Answer 1

Answer:

1) Predetermined overhead rate under traditional costing system:

=$\displaystyle \frac{Estimated total manufacturing overhead}{Total direct labour hours}$

= $\frac{RM1,155,000}{35,000Hrs}$

=RM 33 per hour.

Actual labor hours for MXN = 35,000*0.10 hrs = 3,500 hrs

Actual labor hours for TXW = 15,000*2.10 hrs = 31,500 hrs

Overhead cost for MXN = 3500 Hrs * RM 33 /Hr = RM 115,500

Overhead cost for TXW = 31500 hrs * RM 33/Hr = RM 1,039,500

2)Calculation of unit product cost: (Under Traditional costing system)

Cost	MXN	TXW
Direct Material/Unit	30.4	45.2
Direct labor/unit	1.1	23.1
Manufacturing overhead rate/unit	3.3 (115500/35000)	69.3 (1039500/15000)
Total cost per unit	RM 34.8	RM 137.6

3) Calculation of unit product cost: (Under Activity Based Costing System)

Cost	MXN	TXW
Direct Material/Unit	30.4	45.2
Direct labor/unit	1.1	23.1
Manufacturing overhead rate/unit (Refer Workings)	15.68 (548800/35000)	39.92 (598850/15000)
Total cost per unit	RM 47.18	RM 108.22

Workings: Calculation of overhead cost under activity based costing system:

Activity cost pool	Estimated Overhead cost	MXN	TXW
Assembling Products(DLH)	RM 140,000	RM 14,000 (140000*(3500/35000))	RM 126,000 (140000*(31500/35000)
Preparing Batches(Batches)	RM 241,150	RM 72,800 (241150*(560/1855))	RM 168,350 (241150*(1295/1855))
Axial Milling( Machine Hours)	RM 766,500	RM 462,000 (766500*(1540/2555))	RM 304,500 (766500*(1015/*2555))
Total cost	RM 1,147,650	RM 548,800	RM 598,850

4) Traditional Costing

Traditional costing adds an average overhead rate to the direct costs of manufacturing products. The overhead rate gets applied on the basis of a cost driver, such as number of labor hours required to make a product.

Companies usually use traditional costing for external reports, because it is simpler and easier for outsiders to understand. However, it does not give managers an accurate picture of product costs because the application of overhead burden rates is arbitrary and applied equally to the cost of all products. Overhead costs are not allocated to the products that actually consume the overhead activities.

The traditional costing method is best used for manufacturers that only make a few different products.

Activity-Based Costing

Activity-based costing identifies all of the specific overhead operations related to the manufacture of each product. Not all products require the support of all overhead costs, so it is not reasonable to apply the same overhead costs to all products.

Accountants created the ABC method to solve the problems of inaccuracy that result from the traditional costing approach. Managers needed more accurate costing methods to determine which profits were actually profitable and which were not.

Fundamental Difference:

A fundamental difference between traditional costing and ABC costing is that ABC methods expand the number of indirect cost pools that can be allocated to specific products. The traditional method takes one pool of a company's total overhead costs to allocate universally to all products.

Thank You.