Question

QUESTION 2 (25 marks) Macho Bhd manufactures two models of ultra-high fidelity speakers, the X007 model and the X099 model. Below are the data regarding the models: Product X007 X099 Direct Labour Hours 1.8 DLHs per unit 0.9 DLHs per unit Annual Production 5,000 units Total Direct-Labor hours 9,000 DLHs 27.000 DLHS 36.000 DLHS Additional information: • Model X007 requires RM72 in direct materials per unit, and model X099 requires RM50. The direct labour rate is RM10 per hour. The company uses direct labour hour as the base to apply manufacturing overhead cost to products. Model X007 is more complex to manufacture than model X099 and requires the use of special equipment. Because of the required above, the company is considering the use of activity-based costing to apply manufacturing cost to products. Three activity cost pools have been identified as follows: Activity cost pool Activity Measure Estimated Total Cost Estimated Total Activity Machine set-up Special processing General factory Number of setups Machine-hours Direct labor-hours RM360,000 RM180,000 RM 1.260.000 RM 1.800.000 X007 50 12.000 9,000 X099 100 0 27,000 Total 150 12.000 36,000 Required: a) Compute the predetermined overhead rate, (3 marks) b) Compute the unit product cost for each model using direct labor-hour as allocation base. (8 marks) c) Compute the unit product cost for each model using activity based costing system. (11 marks) d) Explain why overhead cost shifted from high-volume to low-volume model under activity-based costing model. (3 marks)

Answer 1

a)	Predetermined OH rate =			Total OH cost / Total DLHs
			=	$ 1800000 / 36000
			=	$   50.00

b)	Computation of Unit Product Cost
	Particulars			X007		X099
	Direct Material			$   72.00		$   50.00
	Direct Labor			$   18.00	(1.8 x $ 10)	$      9.00	(0.9 x $ 10)
	OH			$   90.00	(1.8 x $ 50)	$   45.00	(0.9 x $ 50)
	Unit product cost			$ 180.00		$ 104.00

c)	Computation of Unit Product Cost
	Particulars			X007		X099
	Direct Material			$   72.00		$   50.00
	Direct Labor			$   18.00	(1.8 x $ 10)	$      9.00	(0.9 x $ 10)
	OH			$ 123.00		$   39.50
	Unit product cost			$ 213.00		$   98.50

Workings:

Computation of OH rates
Cost pool	Total cost	Volume	Cost per volume
Machine set up	$    360,000.00	150	$ 2,400.00
Special processing	$    180,000.00	12000	$      15.00
General factory	$ 1,260,000.00	36000	$      35.00

Allocation of OH under ABC approach
Particulars		Rate	X007	Workings	X099	Workings
Machine set up		$ 2,400.00	$ 120,000.00	($ 2400 x 50)	$    240,000.00	($ 2400 x 100)
Special processing		$      15.00	$ 180,000.00	($ 15 x 12000)	0	($ 15 x 0)
General factory		$      35.00	$ 315,000.00	($ 35 x 9000)	$    945,000.00	($ 35 x 27000)
Total Allocated OH			$ 615,000.00		$ 1,185,000.00
No. of units			5000		30000
OH cost per unit			$        123.00		$              39.50

d) This is because previously, under traditional approach the OH cost of special processing was getting allocated to product X099 even though there was no requirement of such processing in the same model. Now under ABC approach, the total OH got divided into some cost pools and got allocated to the products according to the usage of the volumes of the drivers of the cost pool.