Assignment Task: Your group has been approached by Samsung to study and analyse the present situation of the costing technique followed by the company and give a detailed report with suggestions for further improvement.
Samsung is the manufacturers of Galaxy S20, Galaxy Z Flip and Galaxy Note10. The financial report of the company shows that the company is making good profit over a period of time. Mr. Koo In-Hwoi the owner of the Samsung is not satisfied with the profit shown in the reports. He is of the opinion that the company can get more profit if the pricing is done using the right technique. Mr. Koo In-Hwoi feels that the company is calculating the cost of products using a wrong technique and if this is corrected the company can get much more profit than the present one.
The company had been pricing its products on the basis of conventional costing using direct machine hours to allocate total overheads. The firm operates in a competitive market, and prices were set on a 25 per cent mark-up on cost.
As a part of your work you have investigated the following details from the records that can be used for calculation of cost.
|
Product
|
Galaxy S20
|
Galaxy Z Flip
|
Galaxy
|
Total
|
|
NotelO
|
|
Output in units
|
90000
|
50000
|
20000
|
|
|
Direct material cost Rial
|
40000
|
10000
|
16000
|
|
|
Direct labour cost Rial
|
30000
|
35000
|
25000
|
|
|
Machine hours (per unit)
|
5
|
2
|
3
|
|
|
Labour hours (per unit)
|
1
|
2
|
3
|
|
|
Assembling overheads
|
|
|
|
10000
|
|
Maintenance expenses
|
|
|
|
35000
|
|
Material handling expenses
|
|
|
|
45000
|
|
Quality inspection expenses
|
|
|
|
40000
|
|
Advertisement expenses
|
|
|
|
25000
|
|
|
Z Flip
|
Galaxy Notel 0
|
|
|
Galaxy S20Galaxy
|
|
|
The products are assembled & produced in batches of
|
50
|
80
|
85
|
|
The products are sold in batches of
|
10
|
50
|
90
|
|
Requisitions raised for raw material requirement on the stores
|
30
|
20
|
15
|
|
The products are tested for quality control in batches of
|
5
|
10
|
20
|
You have also ascertained the 'cost drivers that could be used:
|
.Cost
|
Cost driver
|
|
Assembling overheads
|
Machine hours
|
|
Maintenance expenses
|
Production nms
|
|
Material handling expenses
|
Requisitions raised
|
|
Quality inspection expenses
|
Quality check run
|
|
Advertisement expenses
|
Orders executed
|
Having attended management accounting course on activity-based costing (ABC) you decide to experiment by applying the principles of ABC to the three products given by Ferrero.
Required:
1. As a group you are expected to write a reflective report to the owner of the company incorporating the following: I. Estimate the cost for the three products using an activity-based cost model for the company.
2. Analyze the newly produced information and assess its implications for managers explaining how the traditional costing system can provide misleading information for decision making.
3. Evaluate the technique of activity based costing, explaining the four stages involved in designing ARC system and how is it different from absorption costing system.
4. Give your recommendations for or against- the use of ABC at Company as compared to absorption costing with rationale.
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