Question

Kumar & Sons Limited makes three products, using broadly the same production methods and equipment for each. A conventional (Traditional) product costing system is used at present, where manufacturing overhead is allocated using machine hour, a volume based driver.

Details of the three products for a typical period are:

Hours per unit Materials per unit
$ Volumes
(units)
Labour
Hours Machine Hours
Product X 0.5 1 16 600
Product Y 1.5 1 10 1,300
Product Z 1 2 20 7,000

Direct labour cost $7 per hour and production overheads are absorbed on a machine hour basis. The rate for the period is $25 per machine hour.

Recently, a competitor has operated in the market so the management accountant of Kumar & Sons has advised the management to consider using an activity-based costing (ABC) system. Upon the management’s approval, the management accountant was tasked to collect additional information. His analysis of the information is based on the overhead cost pools and the associated cost pool drivers.

Further analysis shows that total of production overheads can be divided into the following cost pools as follows:

Overhead Cost Pools %
Costs relating to set-ups 20
Costs relating to machinery 18
Costs relating to materials handling 25
Costs relating to inspection 37
TOTAL 100%

The cost pool drivers that the management accountant has identified are as follows:

Overhead Cost Pools Cost Drivers
Costs relating to set-ups Number of Setups
Costs relating to machinery Machine hours
Costs relating to materials handling Number of movement of materials
Costs relating to inspection Number of inspection



The following activity volumes are associated with the product line for the period as a whole. Total activities for the period are as follows:

Product Type Number of Set-ups Number of movement of materials Number of inspections
Product X 60 10 110
Product Y 110 25 170
Product Z 420 80 620
TOTAL 590 115 900



REQUIRED

(a) In the context of this question, briefly explain the term “volume-based driver”

(b) Calculate the cost per unit for each product using conventional method (round off your answers to 2 decimal places)

(c) Calculate the cost per unit for each product using ABC principle (where necessary, round-off your answers to 2 decimal places) [Hint: Refer to illustration 4-5 on page 139 of your textbook to view the ABC principle]

(d) Comment on the reasons for any differences in the unit product costs in your answers to (b) and (c).

(e) Explain the concept of Activity Based Management and how it can shape continuous improvement in organisation.

Answer 1

Answer:

BOOKKEEPING

An old riddle asks, “Can you name a word with three consecutive double letters?” One possible answer is WOOLLEN - 'double U, double O, double L, …' A more satisfying solution is BOOKKEEPER (or BOOKKEEPING), the only common words with a consecutive triple double.