Shahid Pakistan Limited (SPL) is engaged in the production of three products: J, K and L....

  

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Shahid Pakistan Limited (SPL) is engaged in the production of three products: J, K and L. Following is the extract from its latest annual management accounts: Description J Products K Total L Units Quantity produced and sold 50,000 40,000 30,000 120,000 Rs. in million Material 100 200 250 550 Labour 50 40 25 115 Factory overheads 80 64 40 184 Sales overheads 60 48 36 144 Total 290 352 351 993 Traditionally, SPL has allocated its factory and sales overheads on the basis of labour hours and sales volume, respectively. However, SPL is currently considering the use of activity based costing for a more accurate allocation of expenses. Following data has been collected in this regard: Sales price per unit Machine hours per unit Rs. hours Product J 10,000 Product K Product L 12,000 14,000 0.18 0.30 0.50 Batch size units 2,500 1,000 1,500 Average amount of sales order Rs. in millions 5 6 7 Break-up of overheads is as follows: Factory overheads Repairs and maintenance - machines Set-up costs Fuel and power Other fixed factory overheads Sales overheads Sales ordering department's cost Delivery expenses (units are of same size and weight) Commission on sales Other fixed sales overheads Rs. in million 27 24 99 34 184 6 54 70 14 144 The other fixed factory overheads and other fixed sales overheads accumulate from various minor expenses; therefore, the Cost Accountant advised allocating them according to machine hours. Required: Compare the profitability of each product before and after the implementation of activity based costing. (10) Shahid Pakistan Limited (SPL) is engaged in the production of three products: J, K and L. Following is the extract from its latest annual management accounts: Description J Products K Total L Units Quantity produced and sold 50,000 40,000 30,000 120,000 Rs. in million Material 100 200 250 550 Labour 50 40 25 115 Factory overheads 80 64 40 184 Sales overheads 60 48 36 144 Total 290 352 351 993 Traditionally, SPL has allocated its factory and sales overheads on the basis of labour hours and sales volume, respectively. However, SPL is currently considering the use of activity based costing for a more accurate allocation of expenses. Following data has been collected in this regard: Sales price per unit Machine hours per unit Rs. hours Product J 10,000 Product K Product L 12,000 14,000 0.18 0.30 0.50 Batch size units 2,500 1,000 1,500 Average amount of sales order Rs. in millions 5 6 7 Break-up of overheads is as follows: Factory overheads Repairs and maintenance - machines Set-up costs Fuel and power Other fixed factory overheads Sales overheads Sales ordering department's cost Delivery expenses (units are of same size and weight) Commission on sales Other fixed sales overheads Rs. in million 27 24 99 34 184 6 54 70 14 144 The other fixed factory overheads and other fixed sales overheads accumulate from various minor expenses; therefore, the Cost Accountant advised allocating them according to machine hours. Required: Compare the profitability of each product before and after the implementation of activity based costing. (10)

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Answer To calculate the average ordering cost we first need to ... View the full answer