Question

4. Ughtwerks inc. offers 2 types of photographic services: Scope and Flat. Last year, the company reported the followg net income: UGHTWERKS INC. Income Statement For the year ended December 31, 2015 Revenue Direct Materials Direct Labour Ove head Net,Operating Income ScopeElatTotal $460,000 $400,000 5860,000 0,000 50,000 110,000 90,000 130,000 320,000 270,000 160.000 Currently, managen ent allocates overhead to each product on the basis of direct labour costs There is a proposal 2 assign the overhead costs using an activity based costing (ABC) system. The company has deter ined the following for ABC Overhead Activity Pools Costs of Lach Pool Allocation Base for Activity Level 2015 Activity Level 2015s for Scope Each Pool for Flat Number of Service Sessions 125 Sessions Setup $60,000 Quality Number of Inspections $100,000 SO Inspections 100 Inspections Control Sales and Marketing 350,000 Number of Administrative $60,000 Direct Labour Hours Advertisements The average directjabour rate is $16 per direct labour hour Required (12 marks 25 minutes) d. Compute the overhead rate for each activity under the activity-based costing (ABC) system. (2.5 marks) te the segment profit for each service type and the total net operating profit marks) assuming thet the activity-based costing (ABC) system is implemented. (7.5 c. List two possible shortcomings of implementing ABC system. (2 marks)

Answer 1

a) Overhead activity rate for each activity

Activity pools	Cost of pool	Total activity level	Overhead Activity rate
Production set up	$60,000	200	$300
quality control	$1,00,000	250	$400
sales and marketing	$50,000	50	$1,000
Administrative	$60,000	20000	$3
	$2,70,000

b) Segment and total profit

	Scope	Flat	Total
Revenue	$4,60,000	$4,00,000	$8,60,000
Direct materials	$60,000	$50,000	$1,10,000
Direct labor	$1,90,000	$1,30,000	$3,20,000
Overhead:
Production set up	$22,500	$37,500	$60,000
quality control	$60,000	$40,000	$1,00,000
sales and marketing	$30,000	$20,000	$50,000
Administrative	$35,625	$24,375	$60,000
Total overhead costs	$1,48,125	$1,21,875	$2,70,000
Net operating income	$61,875	$98,125	$1,60,000

c) ABC system is a highely complex and expensive system to implement in an organisation baecuase of the huge amount of data required in the process. All data should be gathered and maintained in the system.

Reports generated by ABC system are not supported by GAAP.