This assignment will assess the following learning outcomes:
• LO1 Analyse costs in business organisations contexts
• L02 Apply cost estimation techniques in a range of business situations
• L03 Evaluate cost and revenue information and costing method for managerial decision-making
• L04 Effectively communicate cost and revenue information in a decision making context. co
ANSWER ALL THE QUESTIONS
Question 1:
ALFIRDOS LTD provides the details of the costs, volume and cost drivers for the three products A, B and C for the year 2015:
|
A |
B |
C |
Total |
| Production and sales (Units) |
30,000 |
20,000 |
8,000 |
|
| Raw material usage (quantity) |
5 |
5 |
11 |
|
| Direct material costs (per unit) |
25 |
20 |
11 |
1,238,000 |
| Direct labour hours |
1 1/3 |
2 |
1 |
88,000 |
| Machine hours |
1 1/3 |
1 |
2 |
76,000 |
| Direct labour cost (per unit) |
8 |
12 |
6 |
|
| Number of production runs |
3 |
7 |
20 |
30 |
| Number of deliveries |
9 |
3 |
20 |
32 |
| Number of receipts |
15 |
35 |
220 |
270 |
| Number of production orders |
15 |
10 |
25 |
50 |
The overhead costs are as follows:
| Set up costs |
30000 OMR |
| Machines Overheads |
760000 OMR |
| Receiving costs |
435000 OMR |
| Packing costs |
250000 OMR |
| Engineering costs |
373000 OMR |
| |
1848000 OMR |
The cost drivers for overhead costs are as follows:
| Set up costs |
Number of Production runs |
| Machines Overheads |
Number of machine hours |
| Receiving costs |
Number of receipts |
| Packing costs |
Number of deliveries |
| Engineering costs |
Number of production orders |
| Total |
|
The company used to allocate overheads to products based on direct labour hours. However, the management noticed that the majority of overheads are more closely related to machine hours than direct labour hours.
Recently, they decided to redesign the cost system by recovering overheads using two volume related bases: machine hours and a materials handling overhead rate of the receiving department. But both current and previous cost system reported low profit margins for product A, which is the company's highest selling product.
After appointing Mr. Khalil as a cost manager, he drew the attention of the management to the benefits of the use of Activity Based Costing and Mr. Khalil Suggested analyzing the overheads of the last period by the major activities in order to compute activity based costs.
Based on the previous information you are required to:
a) Calculate the product costs using a traditional volume related costing system based on the following assumptions:
(i) All overheads are apportioned on the basis of direct labour hours (former costing system)
(ii) The overhead of the receiving department are appointed based on materials handling overhead rate and the remaining overheads are recovered using a machine hour rate.(Current costing system).
(b) Calculate the product costs using activity based costing suggested by Mr Khalil.
(c) Analyse and critically evaluate the differences reported between the product costs in (a) and (b).
Question 2:
KERALA Ltd is a company manufacturing filing cabinets at customer's specific requests without carrying any stock of readymade cabinets. The only stocks held in the stores are raw materials from which the cabinets are produced.
In KERALA Ltd, there are two production departments: Cutting and Assembly. There are also two service departments the Stores and Canteen. All departments are located in the same building.
The information provided below shows the company's budget for the financial year 2015.
Overhead budget for financial year 2015:
| Overhead |
OMR |
| Factory premises rent (including service departments) |
440000 |
| Factory premises insurance (including service departments) |
22,000 |
| Sundry expenses (Cutting department) |
17,080 |
| Sundry expenses (Assembly department) |
8,300 |
| Plant and machinery insurance |
7,800 |
| Depreciation of factory plant and machinerY |
48,000 |
| Assembly department material |
20,000 |
| Indirect labour (including service departments) |
352,000 |
| Administration salaries |
48,000 |
| Sundry Stores costs |
26,740 |
| Canteen costs |
59,280 |
| Total |
1,049,200 |
The administration salaries will be apportioned equally to the cutting department, assembly department, and the stores department.
The following information is also provided:
| Department |
Floor area sq meter |
Indirect labour |
Direct labour |
Value of palnt and machinery OMR |
| Cutting |
100,000 |
12 employees |
48 employees |
220,000 |
| Assembly |
100,000 |
12 employees |
80 employees |
50,000 |
|
10,000 |
4 employees |
4 employees |
10,000 |
| Canteen |
10,000 |
4 employees |
6 employees |
20,000 |
Service centre costs are apportioned as follows:
| Department |
Basis |
| Canteen |
Total numer of employees |
| Stores |
70 % for the cutting departement and 30 % for the assembly departement |
Kerala Ltd has also budgeted for the following levels of activity for the year 2015:
| Department |
Labour hours |
Machine hours |
| Cutting |
2,900 |
4,700 |
| Assembly |
4,200 |
680 |
Based on the previous information you are required to:
(a) Prepare the overhead analysis sheet for Kerala Ltd for the year 2015.
(b) Using appropriate bases, secondary apportion the service department costs to the production department.
(c) Calculate appropriate overhead absorption rates for the production departments. Justify the choice of cost unit.
(d) Using the rates calculated in question (C) above, estimate the amount of overhead to be charged to batch BB125 that would require the following labour and machine hours:
| Department |
Labour hours |
Machine hours |
| Cutting |
29 |
40 |
| Assembly |
30 |
6 |
The actual overhead cost of Batch BB125 is 10000 OMR.
(i) Calculate and compare the budgeted cost and the real cost of Batch BB125.
(ii) Analyse the causes of the under/over absorption shown in your answer to (i) above. Total
Question 3:
On the PDF page, you will find a testimony of Leon Van Schalkwayk, a Strategic finance executive at Impala Platinum, discussing the importance of management accounting and costing methods in the company.
Based on this testimony, your background in the module and on other academic references (books and articles: bibliography is required a minimum of 15 references), you are required to:
(a) Highlight the importance of management accounting in a company compared to financial accounting.
(b) Explain how, according to you as an accounts manager, Impala platinum was able to reduce costs and drive those costs 20% lower than competitors.
(c) As a management accountant, suggest, explain and critically evaluate a managerial accounting method that will assess the effects of volume changes on a firm's costs, revenues, and profit.
(d) Explain how, using different costing methods, Year Management accounting can show different profit levels for the same year.
Attachment:- Testimony of Leon Van Schalkwayk.pdf