Response to the following questions:
Question 1. Read the information on "Boots Pharmaceutical Ltd."
Boots Pharmaceutical Ltd.(Boots) produces three drugs: Banadol, Canadol and Danadol. Since the company started manufacturing four years ago, Boots has used a direct labour-hour-based system to assign manufacturing overhead costs to products.
Boots's president, Bob Lee, has just read about activity-based costing in a trade journal. With some curiosity and interest, he asked his financial controller, Simon Chan, to examine differences in product costs between the firm's current costing and activity-based costing systems.
Boots has the following budget information for the year:
|
|
|
Banadol
|
Canadol
|
Danadol
|
|
|
Cost of direct materials
|
$410,000
|
$530,000
|
$516,000
|
|
|
Cost of direct labour
|
500,000
|
468,000
|
526,000
|
|
|
Number of direct labour-hours
|
14,400
|
13,600
|
4,000
|
|
|
Number of capsules
|
2,000,000
|
1,000,000
|
600,000
|
Boots has identified the following activities as cost drivers and has allocated them to total overhead cost of $400,000 as follows:
|
Activity
|
Cost Driver
|
Budgeted overhead cost
|
Budgeted cost driver volume
|
|
Machine setup
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Setup hours
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$32,000
|
3,200
|
|
Plant management
|
Workers
|
72,000
|
2,400
|
|
Supervision of direct labour
|
Direct labour-hours
|
92,000
|
2,300
|
|
Quality inspection
|
Inspection-hours
|
100,800
|
2,100
|
|
Expediting orders
|
Customers served
|
103,200
|
1,290
|
|
Total overhead
|
|
$400,000
|
|
Simon Chan selected the cost drivers with the following justifications:
Setup hours: The cost driver of setup hours is used because the same product takes about the same amount of setup time regardless of size of batch. For different products, however, the setup time varies.
Number of workers: Plant management includes plant maintenance and corresponding managerial duties that make production possible. This activity depends on the number of workers. The more workers involved, the higher the cost.
Supervision of direct labour: Supervisors spend their time supervising production. The amount of time they spend on each product is proportional to the direct labour-hours worked.
Quality inspection: Inspection involves testing a number of units in a batch. The time varies for different products but is the same for all similar products.
Number of customers served: The need to expedite production increases as the number of customers served by the company increases. Thus, the number of customers served by Boots is a good measure of expediting production orders.
Simon Chan gathered the following information about the cost driver volume for each product:
|
|
Banadol
|
Canadol
|
Danadol
|
|
Machine setups
|
400
|
1,200
|
1,600
|
|
Plant management
|
400
|
800
|
1,200
|
|
Supervision of direct labour
|
400
|
600
|
1,300
|
|
Quality inspection
|
300
|
400
|
1,400
|
|
Expediting production orders
|
90
|
200
|
1,000
|
Required
(a) Use the firm's current costing system to calculate the unit cost of each product.
(b) Use the activity-based cost system to calculate the unit cost of each product.
(c) The two cost systems provide different results; give several reasons for this. Why might these differences be strategically important to Boots Pharmaceutical Ltd.? How does ABC add to Boots's competitive advantage?
Question 2. Virgo Pulp Ltd. processes wood pulp for manufacturing various paper products. The company uses a process costing system for its manufacturing operations. All direct materials are added at the beginning of the process, and conversion costs are incurred uniformly throughout the process. This is the company's production schedule in May
Pulp Direct Conversion
('000kgs) materials costs
Beginning work in process (1 May) 3,000 100% 50%
Started in May 2016 7,000
Units to account for 10,000
Units from beginning work-in-process
(completed& transferred out during May) 3,000
Started and completed in May 5,500
Work-in-process inventory, 31 May 1,500 100% 50%
Total units accounted for 10,000
The following cost data are available:
Work-in-process inventory, 1 May
Direct materials $32,000
Conversion 44,000
Costs incurred during May
Direct materials 240,000
Conversion 189,000
Required:
(a) Calculate equivalent units of direct materials and conversion during May. Use the weighted-average method.
(b) Calculate the cost per equivalent unit for both direct materials and conversion during May. Use the weighted-average method.
(c) Re-compute (a) and (b) above using the FIFO method.
(d) Explain why equivalent unit calculations are necessary in process costing.
Question 3. The BetaCompany(Beta) started business on 1 January 2017. Beta manufactures a specialty honey beer, which it sells directly to Parknshop, Wellcome supermarkets and Watson's Wine Cellar. Honey beer is produced and sold in six-packs, and in 2017, Beta produced more six-packs than it was able to sell. In addition to variable and fixed manufacturing overhead, Beta incurred direct materials costs of $1,012,500, direct manufacturing labor costs of $450,000, and fixed marketing and administrative costs of $341,250. For the year, Beta sold a total of 200,000 six-packs for total sales revenue of $2,700,000.
Beta's CFO is convinced that the firm should use an actual costing system but is debating whether to follow variable or absorption costing. The controller notes that Beta's operating income for the year would be $460,000 under variable costing and $483,000 under absorption costing. In addition, the ending finished goods inventory would be valued at $8.20under variable costing and $9.35 under absorption costing.
Beta incurs no variable nonmanufacturing expenses.
Required:
(a) DetermineBeta's total contribution margin for 2017.
(b) Beta incurs fixed manufacturing costs in addition to its fixed marketing and administrative costs. How much did Beta incur in fixed manufacturing costs in 2017?
(c) How many six-packs did Beta produce in 2017?
(d) How much in variable manufacturing overhead did Beta incur in 2017?
(e) For 2017, how much in total manufacturing overhead is expensed under variable costing, either through Cost of Goods Sold or as a period expense?
(f) Discuss the key factors in choosing a capacity level to compute the budgeted fixed manufacturing cost rate. Which denominator-level capacity concepts emphasize the output a plant can supply? Which denominator-level capacity concepts emphasize the output customers demand for products produced by a plant?