Answer To: Microsoft Word - IA.doc 1 INDIVIDUAL COURSEWORK 50% OF MODULE MARK SUBMISSION DEADLINE: NOVEMBER...
Abhishek answered on Oct 26 2021
A report (1500 words).
Solution 1.a:
(Summary Tables).
i:
Particulars
Widgets
Gadgets
Helios
Total
Sales (Volume)
50,000
40,000
30,000
Selling price per unit
$45
$95
$73
Sales ($)
$2,250,000
$3,800,000
$2,190,000
$8,240,000
Less Prime Cost ( Volume *cost per unit)
($1,600,000)
($3,360,000)
($1,950,000)
($6,910,000)
$650,000
$440,000
$240,000
$1,130,000
Less : Machine Dept. Cost (Machine hrs * Machine hr rate * No. of units)
$120,000
$240,000
$144,000
$504,000
Less : Assembly Dept. cost (Labor hours * labor hrs rate * No. of units)
$288,750
$99,000
$49,500
$437,250
Profit
$241,250
$101,000
$46,500
$388,750
Profitability statement using Activity Based Costing:
First, we need to ascertain the activity rates.
Activity Rate: Cost Pool / Cost Driver
Machining Services = $357,000 / 20,000 = $0.85 per machine hour.
Assembly Services = $318,000 / 530,000 = $0.60 per direct labor hour.
Set-up costs = $26,000 / 520 = $50 per set-up
Order Processing = $156,000 / 32, 000 = $4.875 per customer order
Purchasing = $84,000 / 11,200 = $7.5 per supplies order
Profitability Statement:
Particulars
Widgets
Gadgets
Helios
Total
Sales (Volume)
50,000
40,000
30,000
Selling price per unit
$45
$95
$73
Sales ($)
$2,250,000
$3,800,000
$2,190,000
$8,240,000
Less Prime Cost ( Volume *cost per unit)
($1,600,000)
($3,360,000)
($1,950,000)
($6,910,000)
$650,000
$440,000
$240,000
$1,130,000
Less : Machine Dept. Cost (Machine hrs per unit * Machine hr rate * No. of units)
$85,000
$170,000
$102,000
$357,000
Less : Assembly Dept. cost (Labor hours per unit * labor hrs rate * No. of units)
$210,000
$72,000
$36,000
$318,000
Less : set-up cost (No. of set-up * Rate per set-up ]
$6,000
$10,000
$10,000
$26,000
Less : Order Processing Cost
$39,000
$39,000
$78,000
$156,000
Less Purchasing Cost ( No.of supplier order * rate of supplier order)
$22,500
$30,000
$31,500
$84,000
Profit
$287,500
$119,000
($17,500)
$480,000
ii)
You can identify the differences between the product profitability calculated under both the costing methods. We certainly have a total higher profit under activity-based costing than under traditional absorption costing system, but under traditional absorption costing system, the Helios product is profitable but fairly under activity-based costing it is in the loss for $17,500. In the traditional costing system, the profit for the product Widgets is $241,250 while it is $287,500 under the activity-based costing method, there is a difference of almost $40,000. Furthermore, in the case of gadgets, the profit ascertained under activity-based costing is more than the profit ascertained under the traditional costing method.
The reason can be identified that the allocation of the overhead expenses made this profitability difference between both the methods. Also, the feelings of the CEO was right that the traditional costing method is the reason that the cash cow like Widgets has shown falling the profits despite the sales remaining steady. For gadgets, due to inappropriate overhead cost allocation, the traditional costing shows a lower profit than it should be. The activity-based costing system shows the fairer picture of the profitability for all three products because it allocated the overhead expenses as per the activity performed by the departments for each product.
Therefore, activity-based costing clears the picture about the profitability of each product, the cash cow like widgets was surviving due to charging the overhead expenses related to the activities of Helios product. All the three products and in total has different profitability. The reason behind these differences can be identified as the overhead inputs or overhead cost elements considered. In other words, the overhead cost allocation to different products and cost service centres are the reason behind these differences in the profitability of all three products. The activity-based costing method shows that Helios product is not in profit, but loss and the overall profit for the business is better than the traditional costing system due to the correct profitability of the other two products.
b)
i:
For the company's fundamental reappraisal of the business, the information which should be there:
· Cost information of all the projects of the company.
· Current year and recent year financial data
· Contingent assets and contingent liabilities of the company
· Cost sheet of the company prepared under the different methods of costing.
It can be identified that information presented through the profitability statement for all three products under both the costing methods is helpful. It is quite helpful because you can easily trace the differences between the profitability and identify the most influential rate or cost to a specific product. It also assists that in which product or activity the cost should be managed or minimized.
However, it might be revised or expanded by using the standard costing method so that the budgeted cost and quantity can be compared with the actual results of the business's operations. By using the standard costing method, the variances for each type of cost incurred to the business can be ascertained and also, the control actions can be taken to control the cost for each activity.
ii)
The other information needed to make the more informed judgment is the information regarding the firm's production capacity because, with the production capacity limit, we...