Scenario: You are a management accountant of EON and Brothers Ltd., a manufacturing company that produces two products simultaneously in one of their production plants. You are asked to produce a management report on costing techniques. This company follows a traditional approach to costing and absorbs production overhead using machine hours. The company’s policy is to add a 50% markup on the unit cost to obtain the selling price. The relevant information is given below: EON and Brothers Ltd. produces two similar products called Alfa and Beta. Total Overheads = £155,000 Machine Hours = 58980 hrs Product Alfa Beta Production Units 2,580 5,100 Material Cost per unit £31 £51 Labour Cost per unit £21 £17 Machine Hours per unit 11 6 After discussing with all the important people of the production plant, you have allocated the overhead costs as mentioned below: % Overheads Set up Costs 30 Inspections 40 Materials Handling 30 Cost Pools are as mentioned below: Alfa Beta Total 6 Setups 400 65 465 Inspections 500 275 775 Goods Movements 625 1,700 2,325 The financial director of EON and Brothers Ltd. is considering replacing the existing traditional system with activity-based costing but is unsure exactly what would be involved. He is also determined to keep costs to a minimum and does not want any new system to involve a lot of extra work or expenditure. Required: Prepare a management report for the directors, which must address the following: 1) Define the relevant concepts appropriate for this report. 2) Appraise the current costing system (benefits and drawbacks of the traditional system for EON and Brothers). 3) Introduce Activity Based Costing (ABC) system for EON and Brothers. Discussing general pros and cons of the system. 4) Design ABC system for EON and Brothers (discuss steps) 5) What are the Costs per unit of Alfa and Beta under traditional and ABC costing systems? What would be the prices of Alpha and Beta traditional and ABC costing systems? Compare the costs and prices calculated in the two systems (Calculations should be shown in the appendix) and for analysis 6) Discuss your recommendation on the viability of ABC for EON and Brothers Ltd., given the financial director's concerns.
Scenario:
You are a
produces two products simultaneously in one of their production plants. You are asked to produce
a management report on costing techniques. This company follows a traditional approach to costing
and absorbs production overhead using machine hours. The company’s policy is to add a 50%
markup on the unit cost to obtain the selling price.
The relevant information is given below:
EON and Brothers Ltd. produces two similar products called Alfa and Beta.
Total Overheads = £155,000
Machine Hours = 58980 hrs
Product Alfa Beta
Production Units 2,580 5,100
Material Cost per unit £31 £51
Labour Cost per unit £21 £17
Machine Hours per unit 11 6
After discussing with all the important people of the production plant, you have allocated the
overhead costs as mentioned below:
% Overheads
Set up Costs 30
Inspections 40
Materials Handling 30
Cost Pools are as mentioned below:
Alfa Beta Total
6
Setups 400 65 465
Inspections 500 275 775
Goods Movements 625 1,700 2,325
The financial director of EON and Brothers Ltd. is considering replacing the existing traditional
system with activity-based costing but is unsure exactly what would be involved. He is also
determined to keep costs to a minimum and does not want any new system to involve a lot of extra
work or expenditure.
Required:
Prepare a management report for the directors, which must address the following:
1) Define the relevant concepts appropriate for this report.
2) Appraise the current costing system (benefits and drawbacks of the traditional system for
EON and Brothers).
3) Introduce Activity Based Costing (ABC) system for EON and Brothers. Discussing general pros and
cons of the system.
4) Design ABC system for EON and Brothers (discuss steps)
5) What are the Costs per unit of Alfa and Beta under traditional and ABC costing systems?
What would be the prices of Alpha and Beta traditional and ABC costing systems? Compare
the costs and prices calculated in the two systems (Calculations should be shown in the
appendix) and for analysis
6) Discuss your recommendation on the viability of ABC for EON and Brothers Ltd., given the
financial director's concerns.
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4) Design ABC system for EON and Brothers (discuss steps)
5) What are the Costs per unit of Alfa and Beta under traditional and ABC costing systems?
What would be the prices of Alpha and Beta traditional and ABC costing systems? Compare
the costs and prices calculated in the two systems (Calculations should be shown in the
appendix) and for analysis
6) Discuss your recommendation on the viability of ABC for EON and Brothers Ltd., given the
financial director's concerns.
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