Question

Question 2 The Morris Company produces metal frames-frame A and frame B. Factory overhead is applied on the basis of machine hours. There were 50.000 frames of A and 200,000 Trames of B produced and the following costs for direct materials and direct labour were incurred: Direct Materials ($) Direct Labour (S) Frame A 10,000 4,000 Frame B 100,000 40,000 Factory overhead costs of $154,000 in total were incurred. The data in the following table relate to the factory overhead costs of $154,000. There are three different activity cost drivers. Eram Overhead activity Maintenance Machining Set ups Material handling Total Overhead Cost ($) Cost Driver 44000 Machine hours 55000 Machine hours 25000 Number of set ups 30000 Number of moves 154000 Cost Driver Consumption Frame A Frame B 2000 20000 2000 20000 40 60 50100 Required: (a) If the company used a plant-wide rate last year to apply overhead to the products on the basis of machine hours as the base for applying overhead, calculate: The plant-wide factory overhead recovery rate per machine hour ii. The cost per unit of each product (b) If the company decided to adopt activity-based costing to apply overhead cost to the products using the cost drivers as basis, calculate for last year: 1. The factory overhead recovery rate for each of the cost drivers ii. The cost per unit of each product iii. The total cost to produce each product (c) Your manager has also asked you to identify the key features of organisational policy & procedures that need to be updated if the company wishes to switch to ABC costing system now.

Answer 1

Part C

Procedures that need to be updated in the policy of the company will be -

1) Identify the activities and cost drivers necessary for the product.

2) Separate each activity into its own cost pool like here n the example maintenance and set ups are given.

3) Assign cost driver to each activity.

4) Divide the total cost with the cost driver to arrive at a cost driver rate.

5) Finally multiply that rate with consumption amount of that product.

Also organisation will be require to train there staff to use ABC costing method , hence the policy will include the training of staff into it.

Port B ) factores everhood Recovery role for each cod Mastrona drivers 2 100 22000 - = 2/ka Tot ceest rate cat dues Consumption 1600 on 2.5 - el hour Machering set ceps 25000 = 250/set en 100 Material handelene, 30000 ISO 7 rare 2 cost per wil B 10.000 4,000 100.000 u0.000 Porticular Dired malencs Pires laboer Mantener reachiring Det er Matrid handlers 4000 ( 2x2000 Sao C2-5*200 10000 Cuox250) 10000 (50r209) 10000 (2x20,000 50000 (2.5*22002) (5002 (60R2,0 20000 100x200) 265000 43,000 SOON Io cost Vinite cost (carit cost of 20 QIOD 1.325 (cort 0.86 / wat 43,000 3 ? To rola A = 0 6 265,000

Part 1 Factory overhead recovery rate per machine hour Total overheed cost Tetes mochere hovu 154,000 15uooo 22000 a $7 2000+20000 il cost I und & each product A 10.000 Portecedor Dcred Maleria Direct Laboen Fadore, overhead 100,000 40,000 4,000 140000 14,000 (2000x) Tole Tolos Cast frome 28.000 50,000 (20000 230,000 20000 Cost (unst $ 0.56 wait $ 1.lund