Measure the impact of changes on business performance An electronic manufacturer
ID: 2448158 • Letter: M
Question
Measure the impact of changes on business performance
An electronic manufacturer makes two network boards, A and B, for the computer industry. Component board A is produced in batches of 10,000 units and Component board B in batches of 1000 units. Each batch has set up costs of £250 and quality inspection costs of £150.
The company produces 50,000 units of board A and 50,000 units of board B each week. The commpany charges overheads on the basis of labour hours, which are 500 hours for board A and 500 for board B.
(a) Calculate the overheads charged to board A and B each week on the basis of labour hours.
(b) Calculate the overheads charged to board A and B each week using activity based costing with the cost drivers of set up and quality inspection.
(c) State and justify which is the more appropriate method of charging overheads to output.
Explanation / Answer
WORKING NOTE:
TOTAL SET UP COST=£1,250+£12,500=£13,750
TOTAL QUALITY INSPECTION COST=£750+£7,500=£8,250
(a). OVERHEADS TO BE CHARGED TO BOARD A AND BOARD B EACH WEEK ON THE BASIS OF LABOUR HOURS
OVERHEADS WILL BE DIVIDED EQUALLY SINCE LABOUR HOURS ARE SAME
OVERHEADS CHARGED TO EACH OF BOARD A AND B
SET UP COST=£13,750/2=£6,875
QUALITY INSPECTION COST=£8,250/2=£4,125
(b) USING ACTIVITYBASED COSTIN OVERHEAD CHARGED IS CALCULATED IN WORKING NOTE ABOVE
(c) THE ACTIVITY BASED COSTING METHOD OF CHARGING OVERHEADS IS MORE APPROPRIATE AS IN THIS CASE OVERHEADS ARE DIVIDED ON THE BASIS OF NO.OF BATCHES AND THE SET UP COST AND QUALITY INSPECTION COST ARE INCURRED PER BATCH.LABOUR HOURS IS NOT A CORRECT BASIS.
PARTICULARS BOARD A BOARD B UNITS PRODUCED PER WEEK (1) 50,000 UNITS 50,000 UNITS UNITS IN 1 BATCH (2) 10,000 UNITS 1,000 UNITS NO.OF BATCHES (3)=(1)/(2) 5 50 SET UP COST OF EACH BATCH (4) £250 £250 TOTAL SET UP COST (5)=(3)*(4) £1,250 £12,500 QUALITY INSPECTION COST PER BATCH (6) £150 £150 TOTAL QUALITY INSPECTION COST(7)=(3)*(6) £750 £7,500 LABOUR HOURS 500 500