Kumar Limited makes three products, using broadly the same production methods and equipment for each. A conventional product costing system is used at present, although an activity-based costing (ABC) system is being considered. Details of the three products for a typical period are: Direct labour cost $7 per hour and production overheads are absorbed on a machine hour basis. The rate for the period is $25 per machine hour. Hours per unit Hours per unit Materials per unit $ Volumes (units) Labour Hours Machine Hours Product X 0.5 1 16 600 Product Y 1.5 1 10 1,300 Product Z 1 2 20 7,000 Further analysis shows the total of production overheads can be divided as follows % Costs relating to set-ups 20 Costs relating to machinery 18 Costs relating to materials handling 25 Costs relating to inspection 37 100% The following activity volumes are associated with the product line for the period as a whole. Total activities for the period: Number of Set-ups Number of movement of materials Number of inspections Product X 60 10 110 Product Y 110 25 170 Product Z 420 80 620 590 115 900 You are required: Calculate the cost per unit for each product using conventional methods. To calculate the cost per unit for each product using ABC principles. To comment on the reasons for any differences in the costs in your answers to (a) and (b)) Explain the concept of Activity Based Management and how it can shape continuous improvement in organisation.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Kumar Limited makes three products, using broadly the same production methods and equipment for each. A conventional product costing system is used at present, although an activity-based costing (ABC) system is being considered. Details of the three products for a typical period are:
Direct labour cost $7 per hour and production
|
Hours per unit
|
Hours per unit
|
Materials per unit $ |
Volumes (units) |
|
|
|
Labour Hours |
Machine Hours |
|
|
|
Product X |
0.5 |
1 |
16 |
600 |
|
Product Y |
1.5 |
1 |
10 |
1,300 |
|
Product Z |
1 |
2 |
20 |
7,000 |
Further analysis shows the total of production overheads can be divided as follows
|
|
% |
|
Costs relating to set-ups |
20 |
|
Costs relating to machinery |
18 |
|
Costs relating to materials handling |
25 |
|
Costs relating to inspection |
37 |
|
|
100% |
The following activity volumes are associated with the product line for the period as a whole. Total activities for the period:
|
|
Number of Set-ups |
Number of movement of materials |
Number of inspections |
|
Product X |
60 |
10 |
110 |
|
Product Y |
110 |
25 |
170 |
|
Product Z |
420 |
80 |
620 |
|
|
590 |
115 |
900 |
You are required:
Calculate the cost per unit for each product using conventional methods.
To calculate the cost per unit for each product using ABC principles.
To comment on the reasons for any differences in the costs in your answers to (a) and (b))
Explain the concept of Activity Based Management and how it can shape continuous improvement in organisation.
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