Accounting

Rodney Laing, the management accountant of Happy Traveller Ltd, has revealed that the expenses of lighting and heating, insurance of buildings and property taxes are likely to be driven by area occupied; employee-related expenditure (salaries of works management) is likely driven by number of employees, and depreciation and insurance of machinery are likely to be allocated based on book value (BV) of the machinery.

Besides, Rodney assumes that the overhead rates for machine production centres should be based on machine hour rate and assembly centre should be based on direct labour hour rate.

Details of total materials issues (direct and indirect materials) to the production centres are as follows:

The expenses in the service centres are to be allocated to production centres based on value of materials issued for ‘materials procurement’ and direct labour hours for ‘general factory support’.

Happy Traveller Ltd has recently experienced with lower profits and ‘complex’ luggage type product seemed to have much lower profit margin than the ‘simple’ luggage type. Rodney has learned about the Activity Based Costing (ABC) systems and found that the three production centres established for the traditional costing system can also be assumed to be the activity cost centres with the ABC system. However, the materials procurement cost centre, the following activity centres’ data have been established:

The general factory support has the following three activity cost centres’ data:

There will be one order, one material receipt and one inspection per batch of luggage (all types) produced. The set-up time for one batch of Simple luggage is 50 set-up hours and the set-up time for one batch of Complex luggage is 10 set-up hours. Besides, a batch of 100 units of Simple luggage requires five production runs, while a batch of 200 units of Complex luggage requires only one production run.

Required:

1) Perform overhead analysis systematically firstly based on traditional costing system. The overhead analysis under traditional costing system involves two-stage allocation process by assigning all manufacturing overheads to production and service cost centres, and followed by reallocating the costs assigned to service cost centres to production cost centres. Provide the calculations of the manufacturing costs assigned to the two products (Simple luggage and Complex luggage).

2) Perform again the overhead analysis using Activity-based costing (ABC) system. The overhead analysis under ABC system involves assigning costs to activity cost centres. Provide the calculations of the manufacturing costs assigned to the two products (Simple luggage and Complex luggage) based on ABC system.

3) Compare the product costs calculated under the traditional costing system and ABC system and explain the rationale behind the differences in product costs calculated under the two costing systems.

4) Analyse the cost versus benefit considerations in adopting ABC system in Happy Traveller Ltd.

5) Explain in details in what ways the ABC cost management can be applied in Happy Traveller Ltd besides assigning costs to its products.

report:

There are four sections

Introduction

Explain the purpose of this report

The significance of traditional costing systems and activity based costing Cite references to support your discussion in the section

Discussion

For Happy Traveller Ltd case, show the workings of the above requirements 1) to 3)

Conclusion

For Happy Traveller Ltd case, give answers for the above requirements 4) to 5)

References

Langfield-Smith K, Smith D, Andon P, Hilton RW & Thorne H 2017, Pack Management Accounting: Information for creating and managing Value + Connect Online,8th edn, McGraw-Hill Education, Sydney. ISBN 9781760420406.