Tutorial 3 Activity Based Costing Q N A 1 2

MAF 451 COSTS AND MANAGEMENT ACCOUNTING
SEMESTER 2 SESI 2018/2019

TUTORIAL 3: ACTIVITY BASED COSTING (ABC)
QUESTION 1 [MAF451 JUNE 2017]
Kelisa Bhd produces commercial cleaning products for household since 2012. The company
has been adopting the traditional way in allocating its overhead costs to the products
using blanket rate based on machine hours. To remain competitive in the market, the
management of Kelisa Bhd would like to use activity-based costing to allocate overhead
costs in the future rather than the use of traditional costing method.
The following is the manufacturing overhead costs estimates for a year:
Activity Activity Cost Driver Activity Cost

(RM)
Purchasing of material No. of material purchase orders 295,500
Move material to mixing No. of moves 82,000
Mixing material No. of mixing hours 240,000
Bottling and packaging No. of machine hours 457,500
Quality inspection No. of inspections 125,000
Total 1,200,000
The management has ascertained the following cost drivers and the volume of each
activity cost driver expected for a year to be as follows:
Activity Cost Driver Volume

No. of material purchase orders 23,640
No. of moves 32,800
No. of mixing hours 30,000
No. of machine hours 50,000
No of quality inspection 25,000
Recently, the Sales Department received a request to quote an order from Talap Services
Enterprise which orders for 750 bottles of cleaning products. The company estimates that
the order from Talap Services Enterprise will require RM3,065 in raw materials and
RM1,093 in direct labour costs.
The manufacturing activities for the job order from Talap Services Enterprise are as
follows: usage 750 botlles
No. of material purchase orders 10 orders

No. of moves to mixing 20 moves
No. of chemical mixing hours 6 mixing hours
No. of bottling and packaging hours 8 machine hours
No. of inspections 10 inspections
Required:
a. Calculate the cost per bottle for job order from Talap Services Enterprise using
traditional costing method.
(4 marks)
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b. Calculate the cost per bottle for job order from Talap Services Enterprise using
activity-based costing method.
(10 marks)
c. Briefly explain THREE (3) advantages why Kelisa Bhd need to change from
traditional costing method to Activity-based costing method.
(6 marks)
d. Briefly explain the term “Blanket Overhead Absorption” and “Departmental Overhead
Absorption”.
(3 marks)
ANSWER QUESTION 1
a) Total manufacturing costs – order from Talap Services Enterprise using traditional
costing method
RM
Raw material cost 3,065
Direct labour cost 1,093
Manufacturing Overhead *RM24 x 8 machine hours 192
Total manufacturing cost: 4,350

* Overhead absorption rate = RM1,200,000 = RM24 per machine hour
50,000 machine hours
Manufacturing cost per bottle = RM4,350 ÷ 750 bottles = RM5.80 per bottle.
b) Activity Based Costing Method:
Cost Driver Rate:

Activity Cost/Volume Cost Driver rate
Purchasing of material RM295,500/23,640 orders RM12.50 per order
Move material to mixing RM82,000/32,800 moves RM2.50 per move
Mixing material RM240,000/30,000 mix.hours RM8.00 per mixing hr
Bottling and packaging RM457,500/50,000 mach.hours RM9.15 per mach. Hr
Quality inspections RM125,000 / 25,000 inspection RM5.00 per inspection
Computation of Manufacturing cost using ABC method:
RM
Raw material cost 3,065.00
Direct labour cost 1,093.00
Manufacturing Overhead:
Cost driver rate x usage
Purchasing of material RM12.50 x 10 orders 125.00
Move material to mixing RM2.50 x 20 moves 50.00
Mixing material RM8.00 x 6 mixing hours 48.00
Bottling and packaging RM9.15 x 8 machine hours 73.20
Quality inspection RM5.00 x 10 inspection 50.00
Total manufacturing cost: 4,504.20
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Manufacturing cost per bottle = RM4,504.20 ÷ 750 bottles = RM6.00 per bottle.
c) Three (3) advantages of ABC method:

i. Improve pricing decision + explanation
ii. Better control as cost pools are distinguished + explanation
iii. Better links to behavior + explanation
iv. Better understanding towards costs not driven by volume + explanation
d) Blanket OH absorption: it does not require any allocation and reapportionment of

overhead to cost center. The total production OH of the organization is absorbed on a
single absorption basis.
Departmental OH absorption: where the total production OH for each department is
determined using allocation and apportionment of OH. For each department, OH are
absorbed into the products based on the most suitable or appropriate basis
(6√ x ½ mark = 3 marks)
QUESTION 2
Face Shoppe Sdn Bhd manufactures two types of moisturizer for anti aging skin products:
Shisho and Quino. It manufactures 1,000 units of Shisho and 5,000 units of Quino per
month. The company price it products at a markup of 20% on cost. The company is
currently using direct labour hours as a basis to absorb its manufacturing overhead cost.
Direct costs per unit for the two products are as follows:
Shisho Quino
Direct material RM30 RM50
Direct labour hour (RM15/labour hour) 2 hours 3 hours
The details of the manufacturing overhead cost are:
RM
Machine related 360,000
Set-up and inspection 202,500
Maintenance 96,000
Engineering 120,000
Total 778,500
The company is planning to automate its plant operation soon and wishes to apply the
activity-based costing method to absorb its manufacturing overhead cost. Face Shoppe Sdn
Bhd has set the cost driver for each of its manufacturing overhead cost component as
follows:
Manufacturing Overhead (cost pool) Cost Driver

Machine related cost Machine hours
Set-up and inspection Number of production runs
Engineering Engineering change orders
Maintenance Maintenance hours
The manufacturing requirements of each product is shown below:
1. Shisho and Quino require 4 machine hours and 1 machine hour, respectively.
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2. Shisho is manufactured in batches of 50 units per production run and Quino is based
on 200 units per production run.
3. 100 engineering change orders is received of which 75% is traceable to Shisho and
the balance to Quino.
4. 80% of the maintenance hours is dedicated to Shisho and 20% to Quino. A total of
1,920 maintenance hours is required.
Usage:
Manufacturing Cost Driver Total Shisho Quino
Overhead
1,000 units 5,000 units
Machine related Machine hours 9,000MH 4x1000= 1x5,000

cost 4,000hours =5,000units
Set-up and Number of 45 runs 1,000/ 50 = 5,000/200 = 25

inspection production runs 20 runs runs
Engineering Engineering change 100 orders 75 orders 25 orders

orders
Maintenance Maintenance hours 1,920 80% x 384 hours

hours 1,920 =
1,536
Required:
a. By using the direct labour hours as the basis to absorb the manufacturing overhead
cost, calculate the followings:
i. manufacturing overhead absorption rate for each product.
ii. selling price for each product.
(8 marks)
b. Using the activity-based costing method as the basis to absorb the manufacturing
overhead cost, calculate the:
i manufacturing overhead absorption rate for each product.

ii selling price for each product.
(11 marks)
c. Comment on the profitability of both products using the current overhead costing
system and the proposed system.
(2 marks)
d. Star Crest University has 20,000 students with a total overhead cost of RM5,000,000
per semester. The university wants to adopt an activity-based costing system for its
overhead costing. The followings are the key activities of the university:
i. providing classrooms and other facilities

ii. developing degree programs
iii. serving students
iv. recruiting lecturers
Determine a suitable cost driver for each of the above key activities.
4
(4 marks)
ANSWER QUESTION 2
ai)
OAR = RM778,500
[(2 X 1,000unit) + (3 x 5,000unit)]
= RM45.80/DLH
a ii)
SHISHO QUINO
Units 1,000 5,000
RM RM
DM 30.00 50.00
DL 30.00 (15x2h) 45.00 (15x3h)
OH(OAR XDLH) 91.60 137.40
PRODUCT COST 151.60 232.40
+ MU (20%) 30.32 46.48
Selling Price 181.92 278.88
ALTERNATIVE
PRODUCT COST X 1.2 151.60X1.2 232.40X1.2
bi)
OH (cost pool) RM Activity (TOTAL) ABC OAR
Machine related OH 360,000 (4,000 + 5,000) 9,000 MH RM40/MH

Set up &Inspec OH 202,500 (20 + 25) 45 runs RM4,500/run
Engineering OH 120,000 100 Order RM1,200/CO
Maintenance OH 96,000 1,920 MH RM50/MH
778,500
b ii)
SHISHO QUINO
Units 1,000 5,000
RM RM
DM 30.00 50.00
DL 30.00 45.00
OH:
Machine related 160,000 200,000
Set up &Inspec 90,000 112,500
Engineering 90,000 30,000
Maintenance OH 76,800 19,200
Total OH 416,800 361,700
OH/unit of production 416.80 72.34
Total Cost 476.80 167.34
+ MU (20%) 95.36 33.46
Selling Price 572.16 200.80
c)
Under the current method, overhead is absorb based on volume (in terms of direct
labour hours) will distort product cost calculation. Under the current method - high-
5
volume products tend to be over-costed - understating profit and on the other hand -
low-volume products tend to be under-costed - overstating profit
The use of advanced high tech equipment in manufacturing & the existence of costs
that do not vary with output (FC) such as set up cost & engineering cost put more
focus on overheads. Therefore it is better to switch to ABC method.
d)
i providing classrooms and other facilities floor area
ii developing degree programs number of degree
programs
iii serving students number of students
iv recruiting lecturers direct professional hours
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MAF 451 COSTS AND MANAGEMENT ACCOUNTING

SEMESTER 2 SESI 2018/2019

QUESTION 1 [MAF451 JUNE 2017]

The following is the manufacturing overhead costs estimates for a year:

Activity Activity Cost Driver Activity Cost

Activity Cost Driver Volume

No. of material purchase orders 10 orders

Total manufacturing cost: 4,350

b) Activity Based Costing Method:

Cost Driver Rate:

Computation of Manufacturing cost using ABC method:

Total manufacturing cost: 4,504.20

c) Three (3) advantages of ABC method:

d) Blanket OH absorption: it does not require any allocation and reapportionment of

The details of the manufacturing overhead cost are:

Manufacturing Overhead (cost pool) Cost Driver

The manufacturing requirements of each product is shown below:

Machine related Machine hours 9,000MH 4x1000= 1x5,000

Set-up and Number of 45 runs 1,000/ 50 = 5,000/200 = 25

Engineering Engineering change 100 orders 75 orders 25 orders

Maintenance Maintenance hours 1,920 80% x 384 hours

i manufacturing overhead absorption rate for each product.

i. providing classrooms and other facilities

Machine related OH 360,000 (4,000 + 5,000) 9,000 MH RM40/MH

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