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

  1. Calculate the total overhead that should be assigned to the order for development of chemicals.
  2. What is the overhead cost per box of chemicals?
  3. If Pix Photographic Supply wee to use a plant-wide predetermined overhead rate based on machine hours, calculate he rate per hour.
  4. Under the approach in requirement 3, how much overhead would be assigned to the order for development chemicals:
    1. in total
    2. per box of chemical?
  5. Explain why these two product costing systems result in such widely differing costs. Which system do you recommend? Why?
  6. 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

  1. Prepare an income statement for Slumberworld for the current year using:
    1. absorption costing
    2. variable costing
  2. Which costing  method, absorption costing or variable costing, shows a higher operating profit? Why?
  3. What would be Slumberworld’s finished goods inventory cost on 31 December, under:
    1. absorption costing
    2. variable costing
  4. Which costing method, variable or absorption, would you recommend to Slumberworld’s management? Why?

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