Question - Alternative costing systems
Cylon Robotic Industries (CRI) has seen out of control testing costs associated with its product lines Domestic Robotics and Industrial Robotics. CRI's current costing system allocates total testing costs to the Domestic and Industrial Robotics based on the number of robots assembled in each line. The logic is that each assembled robot requires testing. Total annual testing costs for the corporation on these two lines were expected at £ 300 000. The table below shows the expected volume of robots assembled.
|
Measure
|
Domestic
|
Industrial
|
Total
|
|
Number of robots assembled
|
1 000
|
1 000
|
2 000
|
|
Number of tests run
|
2 000
|
4 000
|
6 000
|
|
Testing staff hours
|
10 000
|
5 000
|
15 000
|
1. Calculate the firm-wide overhead allocation rate using the number of robots as the allocation base.
2. What is the amount of testing costs assigned to the Domestic and to the Industrial lines?
3. Based on your results for the previous question, what is the cost per Industrial testing hour?
CRI's accountant, Dana Scully held discussions with experienced members of the testing team. She decided that if testing costs were assigned to the two product lines based on the number of times that the teams must run tests, this might be a more accurate estimate on the use of costly staff resources. To compare with the current costing system, Dana decided to develop an alternative costing system with the help of her accounting software package. This system assigns the total testing costs to the Domestic and Industrial product line based on the number of times the teams run a test. She named this new system the 'test-run costing system'. The table above also shows information on tests run for the different lines.
4. Calculate the firm-wide rate using the number of tests run.
5. What is the amount of testing costs that the test-run system assigns to the two product lines?
6. With your results for the previous question, establish the cost per Industrial testing hour under the test-run costing.