CHAPTER 4: COST MANAGEMENT SYSTEMS AND ACTIVITYBASED COSTING pp'128157

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LECTURE 7

• CHAPTER 4 COST MANAGEMENT SYSTEMS AND
  ACTIVITY-BASED COSTING pp.128-157

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Questions

• Lets now revisit the following end-of-chapter
  questions
• 4-A1 p.158 (Multistage ABC column only)
• And try further questions
• 4-A2 p.159
• 4-A3 p.159
• Homework questions
• 4-B2 4-B3

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Solutions 4-A1

• Mechanic wages, indirect ( prod runs)
• Materials, direct
• Fuels for trucks, indirect ( miles)
• Salaries MR staff, indirect ( hours)
• Salaries PS managers, indirect ( prod runs)
• Salaries Purchasing agents, direct (?)
• Salary Cost Accountant, unallocated
• Salary Design Eng., indirect ( hours)
• Salary Executive, unallocated

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Solution 4-A2

• C R 5 or 9 F
• D A 1
• E A 2
• F R 4 V
• G R 5 or 9 F/V
• H R 8 or 9 F
• I A 3
• J R 6 F/V
• K A 10
• L R 1 F

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Solution 4-A3

• Currently RMP uses a traditional approach to cost
  allocation
• It charges indirect manufacturing costs as 300
  of direct materials
• For 100,000 units this gives a gross margin of
  3.2
• Management thus want higher selling price than
  6.20 for additional order

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Solution 4-A3 contd

• Gross margin based on ABC system
• Total cost 3.329
• Direct materials 1.50
• Quality assurance (80 x 0.01) 0.80
• Prod. Sched. (500 x 0.00012) 0.06
• Setups (1,200 x 0.00012) 0.144
• Shipping (5 x 0.005) 0.025
• Shipping Ad. (50 x 0.001) 0.05
• Production (150 x 0.005) 0.75
• Sales price 6.20
• Gross margin (46.3) 2.871

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Solution 4-A3 contd

• The higher margin under ABC (46.3 v 3.2) means
  that a reduction in price may be acceptable.
• Benefits
• Indirect costs are charged to products in a more
  reasonable manner
• Management decisions are based on more accurate
  information (e.g. GP)
• ABC requires thorough review of the costs that an
  organisation is facing
• Costs
• Implementation and design of ABC system is
  expensive