University of Ghana Business School

ACCT403: Cost Accounting

Practice Questions: Accounting for Overhead
4.1 ABC System
(a) Comment on three differences between ABC system and the traditional costing system.
(b) Mention three problems with the use of ABC system.
(c) Prince Roofing Solutions does the roofing for new houses constructed in and around Accra. It charges a flat rate
of GHS25 per square feet of building roofed regardless of the location of the building. Management is wondering
whether they are earning any positive margin on jobs that are located in more remote places that require a
considerable travel time. A member of the management team suggested the use of activity based costing to
investigate this issue. After days of deliberations, management came up with the following cost pools and activity
measures:

Activity Cost Pool Activity Measure Total Activity

Roofing buildings Square feet roofed 5,000,000 square feet
Travel to jobs Kilometres driven 60,000 kilometres
Job support Number of jobs 500 jobs
Other An organisation sustaining activity Not applicable

Overhead cost incurred in running the business for the year totalled GHS330,000, which consisted of the
following:
Salaries to supervisors and administrative staff 200,000
Depreciation of equipment and tools 20,000
Vehicle running expenses 50,000
Office expenses 15,000
Executive compensation 45,000

Resource consumption is distributed across activities as follows:

Distribution of Resource Consumption Across Activity

Roofing Buildings Travel to Jobs Job Support Other Total
Salaries to supervisors and admin staff 60% 20% 10% 10% 100%
Depreciation of equipment and tools 70% 0% 0% 30% 100%
Vehicle running expenses 0% 90% 0% 10% 100%
Offices expenses 0% 0% 70% 30% 100%
Executive compensation 0% 0% 40% 60% 100%

During the year, Prince Roofing executed a 5,000 square-feet building-roofing job for Mr Paulo. The crew that
worked on the job drove 60 kilometres in round-trip from the company’s office to the job site each day. The crew
did the job over 16 days. Other data concerning the job follow:
Cost of roofing materials used GHS80,000
Direct labour hours 0.1 hours per square feet
Direct labour rate GHS6 per hour

Required:
i) Prepare a report showing the first-stage allocations of overhead costs to the activity cost pools.
ii) Compute the activity rates for the activity cost pools.
iii) Prepare a report showing the overhead costs assigned to the Mr Paulo job.
iv) Prepare a report showing the customer margin for Mr. Paulo Job. Was the job profitable?
4.2 [CA_Nov2011_Q5]
(a) Swaggering Ladies manufactures custom jewelry. The company has in the past been using a traditional
overhead cost allocation system based solely on direct labour hours. Sensing that this system was distorting
costs and selling prices, it has decided to switch to an activity-based costing system using three activity cost
pools. Information on these activity cost pools are as follows:
Activity cost pool Estimated activity Estimated overhead costs
Labour related 8,000 direct labour hours 40,000
Machine related 12,500 machine hours 50,000
Quality related 800 number of inspections 12,000
During the period, Job number 309 recorded the following:
Direct materials – GHS900
Direct labour – 30 hours at GHS40 per hour
Machine hours – 80
Number of inspections – 5
It is company policy to earn a profit margin of one-sixth.
Required:
i. State any three (3) factors to be considered in selecting a cost driver
ii. Compute the cost driver rates for Swaggering ladies for the year 2010.
iii. Determine the cost, and hence the selling price of Job number 309 under the activity based costing
system.
iv. Relative activity-based costing system, would Job number 309 have been overcosted or undercosted
under the traditional system and by how much.
(16 marks)

4.3 [CA_May2011_Q1]
The limitations of the traditional costing system is believed to have been resolved by the introduction of Activity
based Costing (ABC).
Required:
(a) Explain and state five (5) merits of the ABC system.
(b) Explain three (3) limitations of the traditional costing system
(c) Wunzoya Ltd manufactures “Shito” for the Ghanaian market. The following data relate to its main three
markets: Accra, Kumasi, and Tamale.
Accra Kumasi Tamale
Gross margin GHS30,000 GHS32,000 GHS31,000
Units sold 825 825 825
Orders placed 800 1,600 1,050
Sales visits 120 110 130
No. of invoices 400 1,000 1,050
Total customers cost required to be allocated to various markets is GHS24,750.
Wunzoya has been using ABC system. The cost accountant has established the following cost driver rates to
allocate customer costs.
Sales visits : GHS10 per visit
Processing of orders : GHS2 per order placed
Cost of dispatch : GHS2 per order placed
Invoicing and debt collection : GHS3 per bill raised
Assuming that traditional costing system would allocate customer costs on the basis of units sold,
i) Prepare a profitability statement based on ABC and rank the markets in terms of profitability.
ii) Prepare a profitability statement based on the traditional costing system and rank the markets in
terms of profitability. (12 marks)