Activity Based Costing

Activity Cost driver OAR Alpha Beta Omega Total

$ $ $ $ $

Machine Number of 737.50 11800 8850 5900 26550

setup costs production /production
runs per run
annum

Machine Machine 2.07/machine 15514 17376 33510 66400

running costs hours hour

Procurement Number of 511/ purchase 12255 14298 21447 48000

costs purchase order
orders per
annum

Delivery costs Number of 388/ delivery 18624 11640 24056 54320

deliveries to order
retailers

Total 58193 52164 84913 195270

Calculation of unit cost

Alpha Beta Omega Total

Costs

Prime costs $58200 $69840 $137880 $265920

Overheads $58193 $52164 $84913 $195270

Total cost $116393 $122004 $222793 $461190

15000 12000 18000

cost/ unit $7.76 $10.17 $12.38

(b)Usinv your calculations from (a) and (b) above explain how activity based costing may help Ericius
Limited improve the profitability of each product.

Fisst and foremost activity based costing has a number of benefits and these benefits can be used by
Ericius management as an instrument or weapon to improve its profitability .These benefits are
explained in detail below.

Activity based costing is effective in controlling in an organisation,therefore can take advantage of this
and control the cost of each product inorder to improve its profitability.

Apart from that activity based costing is more accurate as compared to traditional costing.Accurate
results are vital or important in the sense that they will enable management to come up or to make
sound decisions .Accurate results are useful when making decisions such as the pricing of a product or
when the firm decide whether to make or outsource the product from other suppliers.Therefore if the
information is inacurate ,the entity will make decisions that are misleading or deceiving.

In addition to that activity based costing takes the identification or ascertainment of cost drivers into
aacount,therefore Ericius can make use of this attribute to identify those cost drivers that are significant
or that are critical or that drives the cost of the product and come up with strayegies or techniques to
reduce the cost of the activity or product to an acceptable level which would improve the profitability in
return.

Moreso activity based costing is complicated.It means that important questions and answers (concepts)
of the techique are not put under carpet,therefore Ericius can make us or implement such concepts
inorder to improve the profitability of each product even though the concepts are difficult or
complicated.

Furthermore activity based costing can be used as reliable source of information for decision making by
the management.It provides useful information to make decisions concerned about the profitability of
each product.

However activity based costing some limitations or prohibitions which will pose threats to profitability if
Ericius would not take care of them.

Activity based costing its a very expensive system to implement.This had a negative impact on costs and
profitability of the product at the same time.

Apart from that activity based costing it consumes a lot of time because of its steps which are completed
such as the the identification of cost drivers which is very difficult,therefore the entity will not respond
to market changes which had positive impact inthe entity's profitability.In this case the entity will incurr
opportunity cost.

Conclusively activity based costing is more complicated because of the steps invlolved to arrive at a
figure which is used for decision,hence in this case Ericius would prefer traditional costing which consist
of few steps to arrive a figjre which can be used for decision making .
Question 2

(a) Briefly describe the target costing process that Samsung should undertake.

First and foremost Samsung should determine a product specification and estimate an adequate sales
value.Samsung should set a selling price ,which enable the entity to achieve desired market share.More
so Samsung has to estimate the required profit based on return on sales or return on investment ,so
that the entity will be able to derive the target cost ,which is the difference between the selling price
and the required margin.In addition to that the entity has to compile an estimated cost for the product
based on anticipated design specification and current cost levels inorder to derive the cost gap .Last but
not leas the entity has to implement techniques or strategies inorder to close or reduce the gap.

Conclusively samsung should negotiate with the customer before making the decision whether to go
ahead with the project.

Estimated costs per unit $ $

component 1 406

component 2-wiring(1/4. 12.50

×100/95×47.50)

other material 80.50

Assembly labour(30/60 67
×$120.60×100/90)

Production Overhead 60

Variable production costs 100

Expected full cost per unit 726

calculation of the target cost

$ $

sellling price 750

expected margin($750/20%) (50)

target cost 600

calculation of the target cost gap

=estimated or expected cost per unit -target cost

=$726-$600

=$26

Question 3

(a) Process cost account using Fifo

Cost Period cost Completed Equivalent Abnormal Total Cost per unit
element units less closing WIP loss equivalent
equivalent equivalent units
opening WIP units

Materials $13680 8620 780 100 9500 $1.44

Conversion $5992 9420 468 100 9988 $0.60

costs

$19672 $2.04

materials completed units = 10220kg -1600kg

=8620

comversion costs=10220-800kg

=9420kg

calculations

closing stock

(780×$1.44)=$1123

(468×0.60)=$281

abnormal loss

100×2.04

=$2.04

opening WIP=$2560

process account
 units(kg) $(Dr) units(kg) $(Cr)

openinng 1600 2560 completed 10220 20625

wip units/finished
units

input Normal loss 500 -

Materials 10000 13680 Abnormal loss 100 204

conversion 5992 Closing WIP 780 1403

cost

11600 22232 11600 22232

(b)Weighted Average Method

cost Value Period Total Completed Equivalrnt Abnormal Total cost

element in WIP Cost cost Production Closing loss equivalent per
WIP production unit

Materials $2160 $13680 $15840 10220 780 100 11000 $1.44

Conversion $400 $5992 $6392 10220 468 100 11000 56c

costs

$2

calculations (using unrounded figures)

value of opening WIP =$2560

completed units

(10220×2.019537224)=$20640

Abnormal gain

=(100×2.019537224)

=$202
closing stock

=(780×1.427027027)

=1113

(468×0.5925101965)

=277

Process Account

units (kg) $(Dr) Units(kg) $(Cr)

Opening 1600 2560 Completed 10220 20640

WIP units
/finished
units

Input Normal loss 500 -

Materials 10000 13680 Abnormal 100 202

loss

Conversion 5992 Closing WIP 780 1390

costs

11600 22232 11600 22232

references- lecturer's slides,T Louse,ACCA study Packs,www.researchgate.net,