Question

Question 2 Grafton Ltd produces three products: X, Y and Z. The company has been using a single direct labour cost percentage to allocate overhead costs to products. Recently, managers of Grafton have noticed that, due to increasing overbeads and loss of market share, the current costing system is in need of replacement. A specific team has been charged with the responsibility of developing a new system of costing based on activities. Production information is as follows: Production volume Selling price per unit Material cost per unit Labour cost per unit 7,500 units £47 £18 12,500 units £80 4,000 units £68.00 £16.00 £6.40 £25 Total overheads for all three products are: Materials receiving and handling Machine maintenance and depreciation Set-up costs Engineering costs Packaging Total £150,000 £390,000 £18,688 £100,000 £60,000 €718,688 The following information is also provided about the activities involved in the production: 0.5 05 No. of materials movements Machine hours per unit No. of set-ups Proportion of engineering work No. of orders packaged 30% 20% 50% 22 Requirement (a) Calculate the overhead rates and product unit costs for X Y and Z under the existing costing system 3 Marks (b) Using the information provided, decide on the most appropriate cost drivers and allocate the overhead costs accordingly. Calculate product costs for the three products using activity based costing methods to allocate overheads. 12 Marks (c) Critically evaluate activity based costing approaches for allocating overheads. 10 Marks Total 25 Marks

Answer 1

Answe9:- Page 1 * According to data: - a) Existing cost sheets y z Total I particulars x - Production Qty 7,500 sales Value (Rs.) 13,52,500 I 12,500 4,000 10,00,000 2,72,000 16,24,500 -3,12,500 |-64,000 1-1,00,000 -25,600 -5,11,500 -1,55,600 I costs Material 1,35,000 I Labour - 30,000 overheads (in ratio of labour - 1,38,565 cost) | Total costs | -3,03,565 -4,61,882 -1,18,242 -7,18,683 -8,74,382 -2,07,842 -13,85,788 Profits 48,935 1,25,61864,158 2,38,712 Over heads rates- existing 18.48 36.95 29.56

Page - 2 Revised cost sheets Particulars - Total Production QTY 17,500 sales value (RS) 3,52,500 12,500 | 4,000 10,00,000 2,72,000 16,24, 500 costs Material Labour Overheads (Note 1 |-1,35,000 -3,12,500 -64,000 1-1,00,000 -25,600 -5,11,500 -1,55,600 |-1,76,180 -3,13,003 -2,29,506 -7,18,688 below) Total costs -3, 41,180 - 7,25,503 -3,19,106 -13,85,78 profits 11,320 2,74,497 | -47, 106 2,38,712

page-3 b) Note 1 - Allocation of overheads: Particular I 1.2 Total Basis of Allocation Mat rec and 2.595 | 47,468 94,937 1,50,000 No. of Mate Handling cost 1-rial Movemen Mach Main and 135,417 2,25,694 28,889 3.90,000 Machine Depy hours. set up . 11, 168 15,840 | 11,680 18,688 No ob setup 30,000/20,000 50,000 | 1,00,000| Eng% Engineering cost | packing 2,000 14.000 44.000 60,000 No. of Packages 3,13,0032,29,506 . i 1,76,180 25.04 57.38 over heads rates 23.49 new overheads rates 18.48 old 36.95 29.56

Page 4 o Evalution :- > Activity based costing give true .. Pictures of performance of various products and their costs: >> It helps in making correct decisions based on correct information, . a) Under existing casting, all the produts are profitable , hence the company is. doing good. . However, as per ABC, product z is in loss and cutting measures are required for sustainability, - X