Cost and management accounting

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Scenario

Question 1

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
Total overheads 187,000

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

Required:

  1. 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
  2. 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
  3. 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
  4. d) Explain the potential benefits to the company of using an activity-based costing system. 5 Marks

Contents of the assignment:

  • Title Page
  • Contents
  • Introduction
  • Conceptualization of Scenario – Question 1
  • Conclusion
  • References
  • 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