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SILMULTANEOUS EQUATIONS

Let X = maintainance cost after reapportionment of canteen.

Let Y = canteen costs after reapportionment of maintainance

1. X = 25050 + 8/100y2. Y = 24375 + 3/100x

Substituting equation 2 into equation 1.

X = 25050 + 8/100 (24375+ 3/100x)

X = 25050 + 1950 + 3/1250x

X = 27000 + 3/1250x

1247/1250 x = 27000

X =27000/1247/1250

X = $27064.96

Substituting X into equation 2

Y = 24375 + 3/100(27064.96)

= $25186.95

Filling Sealing Maintenance Canteen

$ $ $ $

74,260 38,115 25,050 24,375

1st App. Main. 18,945.47 7,307.54 (27064.96) 811.95

2nd

App. Canteen 15,112.17 8,059.82 2,014.96 (25,186.95)

108,317.64 53,482.36 - -

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REPEATED DISTRIBUTION METHOD

Filling Sealing Maintenance Canteen

$ $ $ $

74260 38115 25050 24375

1st App. Main 17535 6764 (25050) 751

2nd App Can. 15076 8040 2010 (25126)

3rd

App Main 1407 543 (2010) 60

4th

App.Can. 36 19 5 (60)

5th App Main 4 1 (5) -

108318 53482

b) Calculation of Predetermined Overhead Absorption rate:

Filling : $110,000/13100 = $8.40 per direct labour hour.

Sealing: $53,300/10250 = $5.20 per direct labour hour

Filling

O/H Absorbed ( $8.40 X 12820) 107688

Actual o/h 108318

Under absorbed O/H 630

Sealing

O/H Absorbed ($5.20 X 10075) 52390

Actual O/H 53482

Underabsorbed o/h 1092

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c) Product

Raw materials 25.40

Direct labour cost 32.00

Prime cost 57.40

O/h Filling (3 x 8.40) 25.20

Sealing (2 x 5.20) 10.4 35.6

Total cost 93

Profit (2/3 x 93) 62

Selling price 155

QUESTION 4

a) Fundamental differences between a traditional and an ABC system: Traditional cost accounting it is assumed that cost objects consume resources

whereas in ABC it is assumed that cost objects consume activities.

Traditional cost accounting mostly utilizes volume related allocation baseswhile ABC uses drivers at various levels.

Traditional cost accounting is structure-oriented whereas ABC is process-oriented.

b) ABC System being preferred than Traditional Costing System Activity-based costing attempts to better allocate costs to the proper users of

overhead by focusing on activities. Cost are traced to individual activities and

then allocated to cost objects. It is especially effective when the same

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department or departments produce many different types of products. For

instance, more complex products often require more help from service

departments such as engineering, maintenance and materials handling. ABC

encourages managers to focus on activities as well as the use of those

activities. ABC requires managers to look at each cost to increase the benefit

from each dollar spent. It also encourages managers to cooperate because it

shows how their efforts are interrelated. This results in activity- based

management.

(i)

A B C

Direct material 4 3 6

Direct labour 4 6.67 10

Prime cost 8 9.67 16

Overhead 15 25 37.5

Total cost 23 34.67 53.5

Profit per unit 7 15.33 16.5

Selling price 30 50 70

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Workings:

Calculation of overhead absorption rate : 97500/2600 = $37.50 per direct labour hour

Where total labour hours = (A = 24/60 X2000) + (B = 40/60 X 1500) + (C = 60/60 X

800) = 2600.

To get labour hours spent on each unit divide minutes per unit by 60. Therefore overhead per

unit:

Overheads A = 24/60 X37.5 = 15

B = 40/60 X 37.5 = 25

C = 60/60 X 37.5 = 37.5

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(ii) Based on activity based costing

A B C

Direct material 4 3 6

Direct labour 4 6.67 10

Prime cost 8 9.67 16

Overheads:

Material receipts and inspections 5.2 3.47 19.5

Power 12 6 7.5

Material handling 6.5 7.8 3.25

Total cost 31.7 26.94 46.25

Profit per unit (1.7) 23.06 23.75

Selling price 30 50 70

Workings:

Overheads

Calculation of cost driver rates:

Material receipts and inspection: 31200/30 = $1040 per batch of material

Power: 39000/26000 = $1.50 per drill operation

Material handling 27,300/21000 = $1.30 per metre of material handled

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Material receipts and inspections:

A: 1040 X 10/2000 = $5.2

B: 1040 X5/1500 = $3.47

C: 1040 X 15/800 = $19.5

Power

A: 1.50 X 8 = 12

B: 1.50 X 4 = 6

C: 1.50 X 5 = 7.5

Material handling

A: 1.30 X 5 = 6.5

B: 1.30 X 6 = 7.8

C: 1.30 X 2.5 = 3.25