Presentation

11.

Activity Cost Pool Working Cost per Activity

Purchasing =1,120,000/4000 280.00

Materials handling =386,000 /2000 193.00

Quality control =180,000/1000 180.00

Mixing =2,090,000 /190000 11.00

Blending =384,000/64000 6.00

Packaging =240,000/48000 5.00

A

Direct labour costs-Expected $1,200,000

Costs of Raw Material $ 10,000,000

Direct labour hours-Expected 100000

Cost-plus markup 25%

Predetermined OH Rate using direct labor hours

=4,400,000/100000

=$44

B

Unit Product costs per kg

1b. Unit Product costs per kg Normal Portland

High Sulphate Resistance

Direct Material 9.00 5.80

Direct Labour 0.24 0.24

Manufacturing Overhead 0.88 0.88

10.12 6.92

2

A

Manufacturing Over Head assigned using Activity Based Costing

Normal Portland High Sulphate Resistance

Purchasing Purchase orders =280*160000/20000 = 2,240 =280*8000/500=4,480

Materials handling Number of setups =193*160000/20000*4 =12,352 =193*8000/500*4=12,352

Quality control Number of batches =180*160000/20000 =2,880 =180*8000/500=2,880

Mixing Mixing hours =11*160000/100*3 =52,800 =11*8000/100*3=2,640

Blending Blending hours =6*160000/100*1= 9,600 =6*8000/100*1=480

Packaging Packaging hours =5*160000/100*0.6 = 4,800 =5*8000/100*10.6=240

Total 84,672 23,072

2

B

Average overhead per kg

=84,672/160,000= 0.53 =23,072/8,000= 2.88

2

C

Unit product Costs

Direct Labour 0.24 0.24

Direct Material 9 5.80

Manufacturing OH 0.53 2.88

9.77 8.92

3.

Sale Price Implications Given 25% Markup

Using Direct Labour =10.12*(1+25%) = 12.65 =6.92*(1+25%) = 8.65

Using ABC =9.77*(1+25%) = 12.21 =8.92*(1+25%) =11.16

Difference =12.21-12.65 = - 0.44 =11.16-8.65 = 2.51

To:

The President

OCI

From: Management accountant

Subject: Explanation of Using different costing methods

Dear Sir,

The conventional costing technique allocates all overheads based on the number of hours worked by the employees. Overheads are first assigned to activities and then assigned to goods depending on their utilization of the activity.

Under activity-based costing, the per-unit cost of both items is greater. Assigning overheads based on direct labor hours considerably undervalues the strong sulphate resistance of a product.

The selling price per kilogram is determined by the corporation using the cost-plus markup approach. The selling price will be lower if the costing technique utilized undervalues the goods. For example, the conventional costing technique yields a selling price of 6.32 x 1.25 = 7.9 for a kilogram bag with high sulphate resistance, but the activity-based costing method yields a lower cost per kilogram. Because direct labor was used as the foundation, the product and its selling price were undervalued.

In case of any further assistance, you can ask me.

Thank you