PART B For the last few years production based on a rate of

PART B For the last few years production based on a rate of $12 per direct labour hour. Since the company recruited a new management accountant, overhead is now allocated using activity based costing (ABC). For the coming year Purposeful Manufacturing budgeted for the following activities and activity costs: $20,000 for Machining $10,000 for Forklifting: $32,000 for equipment setup and $40,000 for quality inspections. The following budgeted information is also available: Purposeful Manufacturing had been allocating overhead to ts Direct Labour Hours for the year Number of machine hours for the year Number of forklift moves for the year Number of batches for the year Purposeful Manufacturing budgeted to produce 8,000 units of Product AA and expected to use 3,000 direct labour hours, 5000 machine hours, 120 moves and 500 batches to produce these units. The prime costs are budgeted at $16 per unit of Product AA. The manufacturing process undertaken at Purposeful Manufacturing begins with setting up equipment where each batch of products requires a different setup. This is followed by machining, where the cost of machining varies directly with the number of machine hours. Forklifts are used to move the work in progress around. Quality inspection is carried out for each batch of products. 8,500 direct labour hours 20,000 machine hours 500 moves 4,000 batches Required: 1) Calculate the cost per unit for Product AA using the company\'s approach to allocating overhead before ABC was implemented by the new management accountant. Show all calculations. 2) Calculate the cost per unit for Product AA using activity based costing. Show all calculations. 3) Outline three situations when activity based costing may be beneficial for a company to use. (2+5+3 10 marks)

Solution

(1) Cost per Unit before ABC:-

8000 Units of Product AA

Prime Cost (8000 * 16)

128000

Overhead (12 * 3000 hrs)

36000

Total cost (A)

164000

Units (B)

8000

Cost per unit (A/B)

20.5

(2) Cost per Unit after ABC:-

Prime Cost (8000 * 16)

128000

Overhead :-

Machining (20000/20000hrs) * 5000

5000

Forklifting (10000/500 moves) * 120

2400

Equipment setup (32000/4000 batches) * 500

4000

Quality Inspection (40000/4000 batches) * 500

5000

Total cost (A)

144400

Units (B)

8000

Cost per unit (A/B)

18.05

(1) ABC costing is usually used in manufacturing industry where a product is completed in more than two activities, the cost of overhead allocated through the consumption of light/labour working hours etc.

(2) In large commercial and industrial construction, many companies exhibit use of activity-based costing. They have significant overhead, such as construction bond purchases, large equipment and machinery and skilled personnel. They also usually either have a range of complex service lines.Example, two warehouse construction projects and two office exterior renovations of different sizes or a diverse range of projects. Through the use of activity-based costing, project estimators and supervisors can assign costs to the correct items and projects, better enabling the construction firm to be cost-competitive by project.

(3) For many years health care providers could simply raise their prices or offer more services to cover increasing costs. To more closely allocate a hospital’s fixed overhead costs to those services that actually utilize a higher portion of the hospital’s resources, more hospitals began using activity-based costing.

Prime Cost (8000 * 16)	128000
Overhead (12 * 3000 hrs)	36000
Total cost (A)	164000
Units (B)	8000
Cost per unit (A/B)	20.5