Question

(a) Phoenix Corporation has 4 departments in its factory consisting of two service departments, Human Resources (HR) and Information System (IS), and two production departments, Machining and Assembly. Each of the production departments produce a single product. The current costs of each department are: $60,000 $2,400,000 $8,756,000 S12,542,000 HR IS Machining Assembly The distribution and consumption of departments' services is given as follows: Service provided to: Machining Assembly HR IS Services provided by: 40% 35% HR 25% 10% IS 30% 60% Required: Using the information provided: (i Determine the total cost of operations for each production department under the step- down method (3 marks) (ii) Discuss the differences between the direct method, the step-down method and the reciprocal method. (3 marks) (b) Harmon Ltd manufactures two types of calculators company is currently using a traditional costing system with machine hours as the cost driver The company is considering whether to use the activity-based costing (ABC) method to allocate overhead costs to products. Budgeted overhead costs of the upcoming accounting period follow Mathematical and Financial. The Budgeted level for activity driver Activity Total Activity driver budgeted activity cost $375,000 Machining Number of machine hours 75,000 machine hours Number of production runs Number of inspection hours $120,000 100 production runs Setup 1,500 inspection hours Inspection $105,000 Budgeted information about the two products is as follows: Mathematical Financial Annual production in units Direct material costs 50,000 $150,000 $50,000 100,000 $300,000 $100,000 Direct labour costs Direct labour hours 2,500 5,000 Machine hours 25,000 50,000 Number of production runs Inspection hours 50 50 1,000 500 Required: (i) Calculate the unit cost of each product if the conventional costing approach is used. (2 marks) (ii) Determine the unit cost of producing each product if activity based costing is used. (4 marks) (ii) Discuss two (2) advantages and two (2) disadvantages of activity based costing. (4 marks)

Answer 1

Caluculaion of costtt operation fo sach Psoducien dlepaetments under Stepolbuen methed. pantfolars HR 6Q000 2400000 56,000 Sach dept. Tddegt Aocetedtto ethes alep the batii a4gc00 10 30', 60 T01al 300 teD Altoutin to Machn300 re) ASSemb 160000 9n40:35 9636 0001412200 Cest de opesatfons fer machinng dptasaeg6pro serte Dioect nethed :sThe cast rcurred alepardments diect allctadel to the Prtoluction depacdment, itheuct orcang 4he elation betoeen the sevie depadioet Stepdoon oetbod: tese cest ncured sewice aleparchnent chesen, ard alluatcol to o4es all depadments, bezt seerd Hiqhes ameud sewice dept. afloctedl to Oenaifng depa'drmed ove leck ghel-Ameurt t

Recipotcal melod 4tese the Resat Ton hetween service deputneut secegnized,and the cese erealeparteed all cladted to al ethes dlepardents Gneludiy sevice departmend Tbf proess fvepedded untiel the cest d senvice depart ments beceme zeero Appsox Lmadelp