Cosmo Technology manufactures three products: GX, TY, and KZ. They all use the same resources but in different quantities – see budgeted data below: Description B 2,500.00 4.00 C 4,000.00 3.00 3.00 500.00 A Planned production units i.e. budgeted Direct labour hours per production unit (LHrs) Machine hours per production unit (Mhrs) Production batch size Machine setups per production batch (Setups Purchase orders per batch Material movement per batch 1,500.00 2.00 3.00 50.00 2.00 4.00 2.00 100.00 3.00 4.00 5.00 1.00 6.00 10.00 4.00 The budgeted production overhead costs for the financial period amount to £400,000. Currently the practice is to absorb overhead costs into product costs using an absorption rate based on direct labour hours. Following this practice, the production overhead cost attributed to each product unit is: Product A - £32 | Product B - £64 | Product C - £48 following a short management course at Newcastle Business School, has recommended Activity Based Costing (ABC) approach to production overhead allocation to the management. The production department have identified the following cost drivers and related cost pools: Driver 150,000.00 Machine hours 75,000.00 Machine setups 100,000.00 Purchase orders 65,000.00 Material movements Cost Pool Amount (£) Machine maintenance Machine setups Purchasing Material handling There is additional £80,000 of overhead costs, caused by several different factors and activities that are mainly labour related and are to be attributed to products on labour hour basis. Required: A. Calculate cost driver rates and the production overhead cost attributed to each product unit using an activity-based approach. B. From management and costing perspectives, briefly discuss why the production director suggested the application of ABC approach to product costing as opposed to the traditional practice in the organisation. C. Briefly discuss four major implementation challenges that a company could face at the introduction phase of an ABC programme.
Cosmo Technology manufactures three products: GX, TY, and KZ. They all use the same resources but in different quantities – see budgeted data below: Description B 2,500.00 4.00 C 4,000.00 3.00 3.00 500.00 A Planned production units i.e. budgeted Direct labour hours per production unit (LHrs) Machine hours per production unit (Mhrs) Production batch size Machine setups per production batch (Setups Purchase orders per batch Material movement per batch 1,500.00 2.00 3.00 50.00 2.00 4.00 2.00 100.00 3.00 4.00 5.00 1.00 6.00 10.00 4.00 The budgeted production overhead costs for the financial period amount to £400,000. Currently the practice is to absorb overhead costs into product costs using an absorption rate based on direct labour hours. Following this practice, the production overhead cost attributed to each product unit is: Product A - £32 | Product B - £64 | Product C - £48 following a short management course at Newcastle Business School, has recommended Activity Based Costing (ABC) approach to production overhead allocation to the management. The production department have identified the following cost drivers and related cost pools: Driver 150,000.00 Machine hours 75,000.00 Machine setups 100,000.00 Purchase orders 65,000.00 Material movements Cost Pool Amount (£) Machine maintenance Machine setups Purchasing Material handling There is additional £80,000 of overhead costs, caused by several different factors and activities that are mainly labour related and are to be attributed to products on labour hour basis. Required: A. Calculate cost driver rates and the production overhead cost attributed to each product unit using an activity-based approach. B. From management and costing perspectives, briefly discuss why the production director suggested the application of ABC approach to product costing as opposed to the traditional practice in the organisation. C. Briefly discuss four major implementation challenges that a company could face at the introduction phase of an ABC programme.
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter4: Activity-based Costing
Section: Chapter Questions
Problem 7E: The management of Nova Industries Inc. manufactures gasoline and diesel engines through two...
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A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Question
Transcribed Image Text:Cosmo Technology manufactures three products: GX, TY, and KZ. They all use the same resources but in different
quantities - see budgeted data below:
A
1,500.00
2.00
Description
B
C
Planned production units i.e. budgeted
Direct labour hours per production unit (LHrs)
Machine hours per production unit (Mhrs)
Production batch size
Machine setups per production batch (Setups
Purchase orders per batch
Material movement per batch
2,500.00
4.00
4,000.00
3.00
3.00
2.00
100.00
3.00
50.00
500.00
1.00
2.00
3.00
4.00
5.00
4.00
6.00
10.00
4.00
The budgeted production overhead costs for the financial period amount to £400,000. Currently the practice is to absorb
overhead costs into product costs using an absorption rate based on direct labour hours. Following this practice, the
production overhead cost attributed to each product unit is:
Product A - £32 | Product B - £64 | Product C - £48
following a short management course at Newcastle Business School, has
recommended Activity Based Costing (ABC) approach to production overhead allocation to the management. The
production department have identified the following cost drivers and related cost pools:
Amount (£)
150,000.00 Machine hours
75,000.00 Machine setups
100,000.00 Purchase orders
65,000.00 Material movements
Cost Pool
Driver
Machine maintenance
Machine setups
Purchasing
Material handling
There is additional £80,000 of overhead costs, caused by several different factors and activities that are mainly labour
related and are to be attributed to products on labour hour basis.
Required:
A. Calculate cost driver rates and the production overhead cost attributed to each product unit using an activity-based
approach.
B. From management and costing perspectives, briefly discuss why the production director suggested the application of
ABC approach to product costing as opposed to the traditional practice in the organisation.
C. Briefly discuss four major implementation challenges that a company could face at the introduction phase of an ABC
programme.
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