Question 1: Activity based costing
The Accountant for Pix Photographic supply Ltd has estimated the following activity cost pools and activity drivers for the coming year:
| Activity | Budgeted overhead cost $ | Activity driver | Required level for activity driver | Cost per unit of activity driver |
| Machine setups | 300,000 | No. of setups | 100 | $3,000 per setup |
| Material Handling | 150,000 | Weight of raw material | 50,000 kg | $3 per kg |
| Hazardous waste control | 75,000 | Weight of hazardous chemicals used | 10,000 kg | $7.50 per kg |
| Quality control | 112,500 | No. of inspections | 1,000 | $112.50 per inspection |
| Other overhead costs | 300,000 | Machine hours | 20,000 | $15 per machine hour |
| Total | 937,500 |
An order for 1,000 boxes of film development chemicals has the following production requirements:
| Machine setups | 4 setups |
| Raw material | 10,000 kg |
| Hazardous materials | 2,000 kg |
| Inspections | 10 inspections |
| Machine hours | 500 machine hours |
Required
- Calculate the total overhead that should be assigned to the order for development of chemicals.
- What is the overhead cost per box of chemicals?
- If Pix Photographic Supply wee to use a plant-wide predetermined overhead rate based on machine hours, calculate he rate per hour.
- Under the approach in requirement 3, how much overhead would be assigned to the order for development chemicals:
- in total
- per box of chemical?
- Explain why these two product costing systems result in such widely differing costs. Which system do you recommend? Why?
- Calculate the unit cost of a production order for 100 specially coated plates used in film development. In addition to direct material costing $180 per plate and direct labour costing $60 per plate, the order requires the following:
| Machine setups | 2 setups |
| Raw material | 800 kg |
| Hazardous materials | 300 kg |
| Inspections | 3 inspections |
| Machine hours | 50 machine hours |
Question 2: Variable costing
Slumberworld Pty Ltd’s planned production for the current year was 15,000 units. This production level was achieved, but only 13,500 units were sold at $60 each. Other data are as follows:
| $ | |
| Direct material used | 120,000 |
| Direct labour cost incurred | 60,000 |
| Fixed manufacturing overhead (actual and planned) | 75,000 |
| Variable manufacturing overhead (actual and planned) | 36,000 |
| Fixed selling and administrative expenses | 90,000 |
| Variable selling and administrative expenses | 13,500 |
| Finished goods inventory, 1 January | None |
The company uses normal costing. There were no work in process inventories at the beginning or end of the year.
Required
- Prepare an income statement for Slumberworld for the current year using:
- absorption costing
- variable costing
- Which costing method, absorption costing or variable costing, shows a higher operating profit? Why?
- What would be Slumberworld’s finished goods inventory cost on 31 December, under:
- absorption costing
- variable costing
- Which costing method, variable or absorption, would you recommend to Slumberworld’s management? Why?
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