Question

The accountant for Snappy Photograph Enterprise (SPE) has estimated the following activity cost pools and activity drivers for the coming year: Activity Budgeted overhead Activity driver Activity level cost (RM) Machine set ups 300,000 No. of set ups 100 set ups Material handling 150,000 Weight of raw 50,000 kg material Hazardous waste 75,000 Weight of hazardous 10,000 kg control chemicals used Quality control No. of inspection 1,000 inspections Other overhead cost 300,000 Machine hours 20,000 hours Total 937,000 112,500 An order of 1,000 boxes of film development chemicals has the following production requirements: Machine set ups Material handling Hazardous waste control Quality control Other overhead cost 4 set ups 10,000 kilograms 2,000 kilograms 10 inspections 500 machine hours

Answer 1

Snappy Photograph Enterprise Requirement a Activity Machine Setups Material Handling Hazardous Waste Control Quality Control Other Overhead cost Overhead Cost (RM) 300000 150000 75000 112500 300000 937000 Activty Level 100 Setups 50000 Kg. 10000 kg. inspections 20000 Machine hours Activity Rate 3000 per setup 3 per kg. 7.5 per kg. 112.5 per inspection pe hour 15 Total Requirement b Activity Level 3000 Activity Machine Setups Material Handling Hazardous Waste Control Quality Control Other Overhead cost Total Activity Rate per setup 3 per kg. 7.5 per kg. 112.5 per inspection 15 per hour 10000 2000 10 500 Total Cost (RM) 12000 30000 15000 1125 7500 65625 1000 65.63 No. of Boxes Cost per Box Requirement Predetermined Overhead Rate = Total Overhead / Machine hours = 937000 / 20000 = RM46.85 per machine hour Requirement d Order Cost = 500 machine hours x RM46.85 = RM23425 Cost per Box = RM23425 / 1000 Boxes = RM23.43

Requirement e

The activity-based costing is unacceptable for external financial reports due to the following reasons:

1.The specific product costs are not stated in the activity based costing. Also, the external reports are less comprehensive than internal reports which are arranged for decision making.

2.The accounting system of the company cannot be altered easily. The cost accounting system of the company is mostly multifaceted and it altering it is a tedious route.

3.The activity-based costing does not conform with the generally accepted accounting principles (GAAP).

4.In the activity-based costing the product costs omit some manufacturing costs and take in some nonmanufacturing costs.

5.There can be handlings by the management in the activity-based costing system and that is why the auditors are on edge with ABC system.