Management Accounting Module (26357) Workshop One (Week 18) Acti"it# $ased %osting !uestion One !

uestion 1 Jones Limited manufactured three main products sharing common facilities. It currently uses a single 'blanket rate calculated on direct labour costs to assign overhead costs to these products. The company is currently facing increased competition from cheaper products in the market. The company management had recently heard about activity-based costing ( !"# system and thought that their costing system needs some development. team$ led by the management accountant$ spent several %eeks collecting the follo%ing data for different activities and products& &roduct' 'roduction volumes in units& -irect Labour cost (per unit# -irect material cost (per unit# Inventory movements (in total# 3achining (hours per unit# 4et-ups (in total# Inspection (in total# Acti"ities ( ()* ./ .,* +, +.) () +)* ) +,)* .0 .+, ,+ + ++) +2* %ost &ools (.# 4et-up cost 3achining 3aterials handling Inspection Total production overhead ,,0 *() +/* 0** 02 +() +01 /)* 1)5$)** * (*** .1 .,) 2( / 52* 1(* !uestions

'age +

+e,uired' a# !ased on the current 6blanket rate$ calculate the full unit costs for the three product lines. (+* marks#

b#

Identify$ for each overhead activity$ an appropriate !" cost driver from the information supplied and then calculate the cost per unit for each product$ using an activity based costing overhead allocation approach. !riefly comment on the reasons for any difference in costs to your ans%ers in (a# above (the difference bet%een the traditional costs computed %ith that of !"#. (/* marks#

(c#

-iscuss the e7tent to %hich !" can overcome distortions in product costing$ %hich often arise through traditional costing system. (+* marks#

-otal 5. marks

'age ,