Question

Question 1 Goodie Inc. manufactures premium quality industrial components. The company adopts job order costing and uses normal costing with activity-based costing to allocate its manufacturing overhead. The annual total overhead costs for the year is broken down into activity cost pools and their respective cost drivers for each cost pool are tabled below. Budgeted Cost (S) Cost Driver Budgeted Activity Overhead Cost Pool Setup Costs Purchasing Costs 240 2,000 60,000 Number of Setups 40,000 Number of Purchases 120,000 Maintenance Hours 24,000 Customer Orders Maintenance Costs Customer Order Processing Costs Electricity Charges 4,000 600 100,000 Kilowatt-Hours 2,500 The following data relates to the current job completed for ABC Ltd, a first time customer. $30,000 $20 per DL hour 50,000 0.5 Direct materials Direct labour rate Number of units completed Direct labour hours per unit Number of setups Number of purchases Maintenance hours Kilowatt-hours 40 400 300 The company's budgeted direct labour hours for the period is 500,000 direct labour hours. Goodie also manufactures other components in its factory. It prices its products based on full product cost plus a 25% mark up. Required: (a) Using normal costing method, compute the price that Goodie should bill ABC Ltd for the current job (rounded to nearest dollar). (8 marks) (b) Discuss the suitability of using activity-based costing to allocate overheads for Goodie (you should compare the suitability of other allocation methods in your answer) (10 marks)

Answer 1

a)

Computation of Price (normal costing)

Direct Materials 30000 Direct Labour (50000*0.5*20) 500000 Prime cost 530000 Total overhead apportioned on basis of Direct Labour hours 17200 60000+40000+120000+24000+100| 000/500000*(50000*0.5) Total Costs 547200 Profit 136800 Total Sales 684000

b.

Computation of price (Activity based)

	Allocation basis	Amt
Prime Cost (As above)	-	530000
Overheads:
Set Up costs (60000/240 * 8)	No of set ups	2000
Purchasing Costs (40000/2000*40)	No. of purchases	800
Maintenance Costs (120000/4000*400)	No of maintenance hours	12000
Customer order processing costs (24000/600*1)	No of customer order	40
Electricity Charges (100000/2500*300)	Kilowatt hrs	12000
TOTAL COST		556840
PROFIT	556840*25%	139210
TOTAL PRICE		696050

Since there are different overhead costs that do not directly depend upon Direct Labour Hours, its more diligent to assign the costs per activity performed to make this product. Hence there is difference in the Overhead costs in the normal method and the activity based method above.

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