Acc200 Assignment Term 1 2018 Assessment Answers
Calculations in two decimal places
1)Calculate cost per unit of the two models of sewing machines under the current traditional costing system.
2)Calculate cost per unit of the two models of sewing machines under Activity based Costing.
3)Sewing easy sells the advance model at a price of cost (under the current costing system) plus 20% and is willing to give the same selling price to the overseas buyer. The overseas buyer wants to purchase only the advance model. Prepare December 2017 Profit and Loss Statement for the advance model where (a) traditional costing is used to calculate the product cost (b) Activity Based Costing is used to calculate the product cost. Analyse why the overseas buyer is interested to buy only the advance model. In your discussion you should highlight the importance of accurate product costing.
4)Seldom will we see that the actual overhead and applied overhead is the same. Discuss why and state three ways to deal with under/over applied overhead costs.
5)What are the main benefits and limitations of ABC system?
Answer:
Q 1
Calculation of cost per unit of the two models of sewing machines under the current traditional costing system:
|
Sewing Easy Ltd | ||
|
Particulars |
Basic Model |
Advance Model |
|
Amount |
Amount | |
|
Direct material costs |
$ 5,20,000.00 |
$ 8,40,000.00 |
|
Direct labour costs |
$ 2,40,000.00 |
$ 3,90,000.00 |
|
Indirect costs (see working note 1) |
$ 1,43,750.00 |
$ 1,06,250.00 |
|
Other operating expenses: | ||
|
Selling and Administration |
$ - |
$ 1,40,600.00 |
|
Interest expense |
$ - |
$ 25,200.00 |
|
office rent |
$ - |
$ 35,900.00 |
|
Total costs |
$ 9,03,750.00 |
$ 15,37,950.00 |
|
No. of units |
1600 |
1500 |
|
Cost per unit |
$ 564.84 |
$ 1,025.30 |
(Refer: Excel Sheet)
Working note: 1
Allocation of all indirect costs as per machine hours:
|
Total indirect costs: | |
|
Particulars |
Amount |
|
Inspection |
$ 20,000.00 |
|
Assembly |
$ 90,000.00 |
|
Production Scheduling |
$ 1,05,000.00 |
|
Machine set up |
$ 35,000.00 |
|
Total |
$ 2,50,000.00 |
|
particulars |
Basic Model |
Advance Model |
Total |
|
Machine hours |
4600 |
3400 |
8000 |
|
Allocation: | ||
|
particulars |
Basic Model |
Advance Model |
|
Indirect Costs allocated |
$ 1,43,750.00 |
$ 1,06,250.00 |
Q 2
Calculation of cost per unit of the two models of sewing machines under the activity based costing system:
|
Sewing Easy Ltd | ||
|
Particulars |
Basic Model |
Advance Model |
|
Amount |
Amount | |
|
Direct material costs |
$ 5,20,000.00 |
$ 8,40,000.00 |
|
Direct labour costs |
$ 2,40,000.00 |
$ 3,90,000.00 |
|
Indirect costs: | ||
|
Inspection |
$ 4,210.53 |
$ 15,789.47 |
|
Assembly |
$ 51,750.00 |
$ 38,250.00 |
|
Production Scheduling |
$ 9,545.45 |
$ 95,454.55 |
|
Machine Set up |
$ 10,000.00 |
$ 25,000.00 |
|
Other operating expenses: | ||
|
Selling and Administration |
$ - |
$ 1,40,600.00 |
|
Interest expense |
$ - |
$ 25,200.00 |
|
office rent |
$ - |
$ 35,900.00 |
|
Total costs |
$ 8,35,505.98 |
$ 16,06,194.02 |
|
No. of units |
1600 |
1500 |
|
Cost per unit |
$ 522.19 |
$ 1,070.80 |
(Refer: Excel Sheet)
Working notes
|
1 | |||
|
Calculation of Activity rate | |||
|
Cost pool |
Cost ($) [A] |
Cost driver [B] |
Cost driver rate ($) [C] = [A]/[B] |
|
Inspection |
$ 20,000.00 |
inspections (200+750) |
$ 21.05 |
|
Assembly |
$ 90,000.00 |
machine hours (4600+3400) |
$ 11.25 |
|
Production Scheduling |
$ 1,05,000.00 |
production runs (50+500) |
$ 190.91 |
|
Machine Set up |
$ 35,000.00 |
Set up hours (100+250) |
$ 100.00 |
|
TOTAL |
$ 2,50,000.00 | ||
|
2 | ||
|
Inspection | ||
|
particulars |
Basic Model |
Advance Model |
|
Cost driver rate |
$ 21.05 |
$ 21.05 |
|
No. of inspections |
200 |
750 |
|
Inspection cost |
$ 4,210.53 |
$ 15,789.47 |
|
3 | ||
|
Assembly | ||
|
particulars |
Basic Model |
Advance Model |
|
Cost driver rate |
$ 11.25 |
$ 11.25 |
|
Machine hours |
4600 |
3400 |
|
Inspection cost |
$ 51,750.00 |
$ 38,250.00 |
|
4 | ||
|
Production Scheduling | ||
|
particulars |
Basic Model |
Advance Model |
|
Cost driver rate |
$ 190.91 |
$ 190.91 |
|
Production runs |
50 |
500 |
|
Inspection cost |
$ 9,545.45 |
$ 95,454.55 |
|
5 | ||
|
Machine Set up | ||
|
particulars |
Basic Model |
Advance Model |
|
Cost driver rate |
$ 100.00 |
$ 100.00 |
|
Set up hours |
100 |
250 |
|
Inspection cost |
$ 10,000.00 |
$ 25,000.00 |
Q 3
Preparation of profit and loss statement of Advance model of sewing machines under the traditional costing system and activity based costing system:
|
Sewing Easy Ltd | ||
|
Advance model | ||
|
Profit and Loss Statement | ||
|
Particulars |
Traditional method |
ABC method |
|
Amount |
Amount | |
|
Cost per unit |
$ 1,025.30 |
$ 1,025.30 |
|
Add: margin @ 20% |
$ 205.06 |
$ 205.06 |
|
Selling price per unit |
$ 1,230.36 |
$ 1,230.36 |
|
Units |
1500 |
1500 |
|
Total Sales (A) |
$ 18,45,540.00 |
$ 18,45,540.00 |
|
Expenses: | ||
|
Direct material |
$ 8,40,000.00 |
$ 8,40,000.00 |
|
Direct Labour |
$ 3,90,000.00 |
$ 3,90,000.00 |
|
Indirect Costs: | ||
|
a). As per Traditional |
$ 1,06,250.00 |
- |
|
b). As per ABC | ||
|
Inspection |
- |
$ 15,789.47 |
|
Assembly |
- |
$ 38,250.00 |
|
Production Scheduling |
- |
$ 95,454.55 |
|
Machine Set up |
- |
$ 25,000.00 |
|
Other Operating Expenses: | ||
|
Selling and Administration |
$ 1,40,600.00 |
$ 1,40,600.00 |
|
Interest expense |
$ 25,200.00 |
$ 25,200.00 |
|
Office rent |
$ 35,900.00 |
$ 35,900.00 |
|
Total Expenses (B) |
$ 15,37,950.00 |
$ 16,06,194.02 |
|
Net Profit (A-B) |
$ 3,07,590.00 |
$ 2,39,345.98 |
(Refer: Excel Sheet)
In this question, it is given that overseas buyer only wants to purchase advance model because firstly units purchased by buyer is 1500 whereas for basic model’s units are 1600. Secondly, Sewing Easy ltd earned profit under ABC method is $ 239,345.98 whereas under traditional method profit is $ 307,590.00 which means overseas buyer got benefit only from ABC method due to less profit margin earned by the seller. This signifies that cost and product issues with the improvement in quality gets resolved from the use of ABC method. The result from ABC method is more accurate than traditional based costing system.
Q 4
Debit or credit balance of manufacturing overhead is called as over or under applied manufacturing overhead respectively. The three ways to deal with under/over applied overhead costs are as follows:
- Written off the under/ over applied overhead costs to the COGS.
- Accurate rates are at end of the year.
- Allocation of under/ over applied overhead costs amongst COGS and stock accounts (WIP and FG) in ratio of unadjusted closing balance.
Q 5
Benefits of ABC system:
- It improves the business processes.
- The biggest benefit is that the indirect overhead costs are allocated to products as per the consumption of each activity.
- It recognizes and excludes non valuable resources or activities which hampers the profitability of the entity (Eldenburg and Wolcott, 2009).
- More precise costing system.
- Cost drivers can be used usefully that are likely to be allocated to the product.
Limitations of ABC system:
- It is very costly to implement ABC system and very expensive to maintain because it requires ample resources (Eldenburg and Wolcott, 2009).
- ABC does not adapt accounting rules.
- It is irrelevant for external reporting purpose.
- Not suitable for small entities.
References
Eldenburg, L.G. and Wolcott, S.K. 2009, Cost management: measuring, monitoring and motivating performance, John wiley and sons.
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