SUBMISSION OF ASSIGNMENT

MUTIARA LIMITED

Mutiara Limited specializes in manufacturing two pearl products; Pearl Version A and Pearl
Version S, using broadly the same production methods and equipment for each. For many years
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the company has used a simple plant-wide manufacturing support cost rate based on machine
hours. The new plant accountant suggested that the company may be able to assign support costs
to products more accurately by using an activity-based costing system that relies on a separate
rate for each manufacturing activity that causes support costs. After studying the plant’s
manufacturing activities and costs, the plant accountant has collected the following data for
2014:

Hours Per Unit Materials Per Production

Labour Hours Machine Hours Unit (RM) (Units)
Pearl Version A 5.0 1.5 85 1,100
Pearl Version S 5.5 2 70 950

Direct labour costs RM8.00 per hour. Further analysis shows that the total of production
overheads, RM657, 000 can be divided as follows:

Activity RM
Costs relating to set-up 288,600
Costs relating to machinery 138,700
Costs relating to design changes 229,700
Total production overhead 657,000

The following activity volumes are associated with the product line for the period as a whole.

A Number of Design
Number of Setups Machine Hours
Changes
Pearl Version A 95 1,650 35
Pearl Version S 75 1,900 30
Total 170 3,550 65

Required:

(a) Assuming machine hours as the base for assigning manufacturing overhead cost to product;

(i) Compute the predetermined overhead rate.

(Round up your answers to zero (0) decimal point).
[3 marks]
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 POHR = 657,000
(1100 x 1.5)(950 x 2)

= 657,000
1650 + 1900

= 657,000
3550

= 185

(ii) By using the predetermined overhead rate computed in (a) (i), calculate the unit
production cost for each type of pearl product.
(Round up your answers to one (1) decimal point).
[2 marks]

Unit Production Cost

PvA PvS
Direct Material 85 70
Direct Labour 8 x 5 = 40 8 x 5.5 = 44
Overhead 185 x 1100 185 x 950
(1100 + 950) (1100 + 950)

= 203,500 = 175,750
2050 2050

= 99.26 = 85.73

Total 224.26 199.73

(b) Using activity based costing as the basis for assigning manufacturing overhead cost to
product to compute the overhead rates,

(i) Compute the activity rate for each of the three activity cost centres listed above.
(Round up your answers to zero (0) decimal point).
[3 marks]

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 Activity Overhead Cost Cost Driver AOR
288,600
170
Setup 288,600 95 + 75 = 170
= 1698

138,700
3550
Machine 138,700 1,650 + 1,900 = 3550
= 39

229,700
65
Design 229,700 35 + 30 = 65
= 3534

Total 657,000

(ii) Using the rates calculated in (b) (i), calculate the unit overhead cost for each product.
(Round up your answers to two (2) decimal points).
[4 marks]

Activity PVA PVS

Setup 95 x 1698 = 161,310 75 x 1698 = 127,350
Machine 1650 x 39 = 64,350 1900 x 39 = 74,100
Design 35 x 3534 = 123,690 30 x 3534 = 106,020
Total 349,350 307,470

Unit overhead cost for each product.

PVA PVS
349,350 307,470
1100 950

= 317.59 = 323.65

(iii) Calculate the unit production cost for each product.

(Round up your answers to two (2) decimal points).
[2 marks]

Activity PVA PVS

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 Direct Material 85 70
Direct Labour 8 x 5 = 40 8 x 5.5 = 44
Overhead 317.59 323.65
Total 442.59 437.65

(c) Based on the answers in part (a) and (b), which of the two unit production costs calculation is
most appropriate. Justify your answer.
[3 marks]

Most appropriate of this unit production costs calculation is the Activity Based Costing (ABC).
This is because of:

i. The calculation covered all cost related to the production activity (Costs relating to set-
up, costs relating to machinery and costs relating to design changes), include direct and
indirect costs.

ii. Produced good quality product.

iii. Exact total expenditure.

iv. The data should be easy to obtain and identifiable with the product.