ACTIVITY BASED COSTING

Question 1
Million manufacturing Bhd. Produces two types of water purifier, WP100 and WP200. The
WP100 is a low volume item totaling only 10,500 units per year whereas, the WP200 is a high
volume item totaling 30,500 units per year. Expected annual manufacturing overhead costs are
RM3,000,000. The company uses a job costing system and applies overhead on a direct labour
hour basis.
Information about the company’s product is as follows:

PRODUCT WP100 WP200

Production (units) 10,500 30,500
Direct material (RM per unit) 30 35
Direct labour (per unit) 1 hour (at RM6 per hour) 2 hours (at RM6 per hour)

Million Manufacturing Bhd’s new manager, Ayman, believes that the traditional product costing
system used by the company produces misleading cost information. He is suggesting the use of
activity based costing and has established the following activity cost pool and cost drivers:

Activity/ cost pool Cost driver Budgeted cost (RM)

Machine processing Number of machine hours 1,200,000
Quality control Number of inspections 600,000
Shipments Number of shipments 550,000
Machine setups Number of setups 650,000
Total overhead cost 3,000,000

Data relevant to these activities are as follows:

Cost Driver WP100 WP200

Number of machine hours 10,000 30,000
Number of inspections 100 300
Number of shipments 150 50
Number of setups 70 30

Required:
(a) Compute the unit manufacturing cost of WP100 and WP200 using:
 i) The current overhead costing system
ii) Activity based costing system

Question 2
Suchy Resources Bhd makes private label commercial cleaning products. Recently, the sales
staff received a request for quote from SP Services Sdn.Bhd which orders for 800 bottles of
cleaning agent.
Before quoting a price, Suchy Resources Bhd gathered the following manufacturing overhead
cost estimates for a year.

Activity / cost pool Activity cost driver Activity cost

Purchasing of material No. of purchase order RM295,550
Move material to mixing No. of moves RM81,480
Mixing material No. of mixing hours RM506,400
Bottling and packaging No. of machine hours RM157,500
Total RM1,040,930

The management has ascertained the following cost drivers and the volume of each activity
cost driver for a year are expected to be as follows:

Activity cost driver Volume

No. of purchase orders 11,500
No. of moves 12,000
No. of mixing hours 12,000
No. of machine hours 9,000
The company estimates that the order from SP Services Sdn.Bhd will required RM1,055 in raw
materials and RM360 in direct labour costs. The manufacturing activities for the job are as
follows:

No. of material purchases orders 10 orders

No. of moves to mixing 20 moves
No. of Chemical mixing hours 6 mixing hours
No. of Bottling and packing hours 4 machine hours

Required:
a) Calculate unit cost of the product if Suchy Resources Bhd adopts activity based costing
system.
b) Calculate unit cost f the product if the manufacturing overhead costs are absorbed by
the product using mixing hours basis.

Question 3

Musim Paint Sdn Bhd manufactures two high quality base paints. A-Based and B-Based. The
company uses the same processing machine to produce both paints in different production
runs.

Activity cost pools Estimated Overheads

RM
Purchasing 240,000
Processing 1,400,000
Packaging 580,000
Testing 240,000
Storing 180,000
Washing 560,000
Total annual budgeted overhead 3,200,000

The following cost drivers were identified and their expected use are as follows:

Activity cost Cost drivers Expected cost Expected use of drivers per
pools Drivers per product
Activity
A-Based A-Based
Purchasing Purchase orders 1,500 orders 800 700

Processing Gallons 1,000,000 400,000 600,000

 processed gallons
Packaging Containers 400,000 180,000 220,000
filled containers
Testing No.of test 4,000 tests 2,100 1,900
Storing Average gallon 18,000 gallons 10,400 7,600
on hand
Washing Number of 800 batches 350 450
batches

The company has budgeted 400,000 gallons of A-Based and 600,000 of B-Based for processing
during the year.

Required:
Compute the overhead cost per unit (gallon) for each product.

Question 4
Sinar Enterprise produces Inject and laser printers with a selling prices per units of RM150 and
RM350 respectively. Last year, the total overhead costs of RM1,050,000 were allocated based
on direct labour hours. A total of 15,000 of direct labour hours were required last year to
manufacture 12,000 inject printers and 10,000 direct labour hours were required to produces
4,000 laser printer. The total direct labour cost and direct material costs for the year were as
follows:

Inject Printer Laser Printer

RM RM
Direct materials 540,000 320,000
Direct labours 600,000 400,000

The management of Sinar Enterprise would like to use activity –based costing to allocate
overhead cost in the future rather than the use of traditional costing which allocates overhead
based on direct labour hours.
The following estimates are made relating to the activities and related cost drivers:

Activity Cost Driver Estimated A- Estimated cost drivers activity

overhead cost
(RM)
Inject printer Laser printer Total
Production No. of production 400,000 40 10 50
 runs runs
Quality Inspection hours 250,000 1,200 2,800 4,000
inspections
Packaging No. of units 400,000 12,000 4,000 16,000
and shipping shipped

Required:
a) Using the traditional overhead allocation method, calculate the following:
i) Pre-determined overhead rate
ii) Overhead cost per unit for the inject and laser printers
iii) Product cost per unit for inject and laser printers

b) Using the Activity based costing method, calculate the following:

iv) Pre-determined overhead rate
v) Overhead cost per unit for the inject and laser printers
vi) Product cost per unit for inject and laser printers

c) Calculate the profit per unit for each product using the traditional method and activity
based costing method. Comment on the differences between the results of the two
methods.