Cost Accounting Ltd manufactures three products. The company allocates overhead
ID: 2527897 • Letter: C
Question
Cost Accounting Ltd manufactures three products. The company allocates overhead costs as a rate per total direct labour hour.
The following cost driver values have been identified:
Machine hours / unit Production units Percentage of expert work Number of orders packed Labour hours
Alpha
0.70 5 000 30% 4
1 200
Beta
0.30 3 500 20% 8 800
Gamma
0.50 8 000 50% 23 1 500
An analysis of the manufacturing overhead cost for the period shows the following:
Activities
Machine costs Expert consultation Packing
Total
Overhead cost
265 000 98 500 15 000
378 500
Required
Marks
7.1
Calculate the overhead rate that they are currently applying to the products.
1.5
7.2
Allocate the manufacturing overhead costs using principles of activity based costing.
12
7.3
Why is activity based costing considered for manufacturing overhead cost allocation?
Required
Marks
7.1
Calculate the overhead rate that they are currently applying to the products.
1.5
7.2
Allocate the manufacturing overhead costs using principles of activity based costing.
12
7.3
Why is activity based costing considered for manufacturing overhead cost allocation?
Explanation / Answer
Activity based costing identifies different cost pool and activities associated with it and allocates cost on this basis, so this gives accurate allocation of cost to products and increases the traceability of the cost to the product or services. In other words ABC costing assigns factory/manufacturing overhead based on the activities identified and assigning cost to those activities according to the actual consumption by each activity. If cost is wrongly traced the product or services can be under priced or over priced which can affect the sales volume and customers. Hence there can be loss of customers in case of over price and loss of revenue in case of under price. So when proper cost is assigned to each activity than we are able to know which cost is in control and which cost is going out of control. So those cost which are increasing we could fix up the responsibility to those handling that and we could take steps to control the cost.
Machine hours M Production units P Machine used M*P % of expert work No. of orders packed Labor Hours Alpha 0.7 5000 3500 30% 4 1200 Beta 0.3 3500 1050 20% 8 800 Gamma 0.5 8000 4000 50% 23 1500 Total 16500 8550 35 3500 Ans 7.1 Overhead rate Estimated overhead/No of direct labor hours 395000/3500 112.86 per DLH Ans 7.2 Alpha Beta Gamma Estimated cost Cost driver Rate per driver Activity Cost allocated Activity Cost allocated Activity Cost allocated Machine Cost $265,000 8550 $30.99 3500 $108,480 1050 $32,544 4000 $123,977 expert Consultation 98500 100 $985.00 30 $29,550 20% $19,700 50% $49,250 Packing 15000 35 $428.57 4 $1,714 8 $3,429 23 $9,857 $378,500 Total cost $139,744 $55,672 $183,084 allocated Manufacturing overhead allocated Alpha $139,744 Beta $55,672 Gamma $183,084 ans 7.3