Photoshop company manufactures photocopying machines. They have three types of machines Small Medium and Large. Current approach of the Company is to allocate overheads based on Labour hours.
The Managing director of the company is happy with the current approach as it is easy for him to understand and it is quick to calculate overhead absorption rate as per the labour hours.
Company has appointed a New management accountant who is eager to adopt Activity based costing approach to overhead allocation as It calculates cost most accurately. The management accountant has already studied the studied the cost drivers and Identified it as below.
|Activity||Overhead Cost(OMR)||Cost Driver|
|Assembly cost||56,000||Labour Hours|
|Purchasing department||44,000||Number of Purchase orders|
|Delivery cost||42,000||Number of Deliveries|
|Machine Maintenance||45,000||Machine Hours|
The following data have also been collected relating to the manufacturing process
|Small photocopiers||Medium photocopiers||Large photocopiers|
|Number of units Produced||1500||1500||2,000|
|Number of machine hours required||1200||400||1400|
|Number of purchase orders||3||2||6|
|Number of Deliveries required||10||30||20|
|Number of labour Hours||3000||4000||3000|
- a) Calculate overhead cost per unit for each of the three sizes of machine (Small, Medium and Large) using the current approach of traditional costing absorbing overhead on the basis of Labour Hours. 4 Marks
- b) Calculate overhead cost per unit for each of the three sizes of machine (Small, Medium and Large) using activity-based costing suggested by the Management Accountant. 6 Marks
- c) Describe the circumstances where traditional costing systems are likely to report distorted costs. You should include appropriate reference by calculating the difference between the costs calculated in parts (a) and (b) above when describing such circumstances. 5 Marks
- d) Explain the potential benefits to the company of using an activity-based costing system. 5 Marks
Contents of the assignment:
- Title Page
- Conceptualization of Scenario – Question 1
- Support your assignments with relevant graphs, charts, tables(quantitative data) ifapplicable. Maximum 1000 words (+ / – 10% margin)
Last Updated on April 23, 2020 by Essay Pro