Question

Question 2 (15 marks) - Topic 6 Nature Productions manufactures two products the company's products for next year are prov icts. Lightning and Flame. Estir for next year are provided below: Lightning Flame Estimated production volume 4,000 5,000 Direct material cost $25 / unit $30 / unit Direct labour per unit 4 hours @ $8/ hour 3 hours @ $8/ hour The company's estimated overhead of $800,000 activities: material handling ($150,000), ass ($90,000). These activities are driven by 9 hours, and number of inspections respective year are as follows: erhead of $800,000 can be identified with three major ($150,000), assembly ($560,000) and quality control are driven by quantity of materials used (kg), machine ections respectively. Estimated activity levels for the next Lightning Flame Total 60,000 Quantity of material used (kg) 40,000 100,000 Machine hours 36,000 44,000 80,000 Number of Inspections 600 2,400 3,000 Required: a) Assuming that Nature Productions uses activity-based costing to apply overhead to production, calculate the (i) total overhead costs, and (ii) unit manufacturing costs, for Lightning and Flame if the estimated manufacturing volume is achieved. (12 marks) b) Why might organisations choose to implement a one-off activity-based costing project rather than an ongoing system? (3 marks) (12 + 3 = 15 marks)

Answer 1

Answer with working is given below

Calculation of Activity rates Total Activity Total Activity rate Material handling Assembly Quality control Total budgeted indirect costs Overheads Activities $150,000 100,000 $560,000 80,000 $90,000 3,000 $800,000 $1.50 per kg of material used $7.00 per machine hour $30.00 Per inspection Allocation of Cost as per ABC method Cost activity rate Activities used Allocated Cost Activity Lightning 60,000 36,000 600 Flame 40,000 44,000 2,400 Material handling $1.50 Assembly $7.00 Quality control $30.00 Total Overheads Allocated Total Volume Overhead cost per unit Lightning $90,000 $252,000 $18,000 $360,000 4,000 $90.00 Flame $60,000 $308,000 $72,000 $440,000 A 5,000 B $88.00 A/B Flame $30 Total manufacturing cost per unit- ABC method Lightning Direct Material $25 Direct Labor $32 Total Overhead allocated $90 Total manufacturing cost per unit) $147| $24 $88 As per above working $142| b) ABC method is used by the company since the allocation of cost is based on actual consumption of activities ABC method should be used because -It helps in accurate product costing - It helps in Product pricing - It helps in better cost management through cost control and cost reduction