A firm has two production departments, the Assembly Department and the Finishing Department. It also has...
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A firm has two production departments, the Assembly Department and the Finishing Department. It also has two service departments: the Stores Department which handles the acquisition, storage and provision of materials to the production departments, and the Maintenance Department responsible for servicing the machinery. Overhead costs are incurred both by the separate departments and by the business as a whole. Budgeted figures for the month of September are as follows: Total £8.000 £25,000 Indirect materials Indirect labour Rent Heat & light Depreciation of machines Machinery insurance Materials general Wages-senior managers Floor space (sg. metres) Machine values REQUIRED: (a) Allocate the general overheads to the four departments, explaining the logic behind your allocation bases. £160.000 £16,000 £200.000 £8,000 £10,000 Production depts Assembly Finishing Stores £2.000 £5,000 Service depts Maintenance £5.000 £3.000 £3,000 £5,000 £10,000 £40,000 80,000 30,000 30,000 5,000 £800.000 £400,000 £300,000 £100.000 15.000 (12 marks) (b) Allocate the service department costs to the production departments. For this purpose, allocate the Stores Department costs on the basis of indirect materials usage by the other departments and the Maintenance Department costs on the basis of the value of the machines used in the production department. (9 marks) (c) The owner of the business thinks that the allocation process detailed at (a) and (b) above is a very complicated way of determining the costs of production and suggests that it would be simpler to just allocate all the overheads according to the departments' use of indirect materials. Re-compute your answers to parts (a) and (b) on the suggested basis and comment on how and why they differ from those originally obtained. (d) Discuss the following statement: "Activity-based costing is just a complicated way of doing traditional absorption costing and generally isn't worth the cost and effort." (14 marks) (e) Why do businesses bother assigning costs to products? (5 marks) A firm has two production departments, the Assembly Department and the Finishing Department. It also has two service departments: the Stores Department which handles the acquisition, storage and provision of materials to the production departments, and the Maintenance Department responsible for servicing the machinery. Overhead costs are incurred both by the separate departments and by the business as a whole. Budgeted figures for the month of September are as follows: Total £8.000 £25,000 Indirect materials Indirect labour Rent Heat & light Depreciation of machines Machinery insurance Materials general Wages-senior managers Floor space (sg. metres) Machine values REQUIRED: (a) Allocate the general overheads to the four departments, explaining the logic behind your allocation bases. £160.000 £16,000 £200.000 £8,000 £10,000 Production depts Assembly Finishing Stores £2.000 £5,000 Service depts Maintenance £5.000 £3.000 £3,000 £5,000 £10,000 £40,000 80,000 30,000 30,000 5,000 £800.000 £400,000 £300,000 £100.000 15.000 (12 marks) (b) Allocate the service department costs to the production departments. For this purpose, allocate the Stores Department costs on the basis of indirect materials usage by the other departments and the Maintenance Department costs on the basis of the value of the machines used in the production department. (9 marks) (c) The owner of the business thinks that the allocation process detailed at (a) and (b) above is a very complicated way of determining the costs of production and suggests that it would be simpler to just allocate all the overheads according to the departments' use of indirect materials. Re-compute your answers to parts (a) and (b) on the suggested basis and comment on how and why they differ from those originally obtained. (d) Discuss the following statement: "Activity-based costing is just a complicated way of doing traditional absorption costing and generally isn't worth the cost and effort." (14 marks) (e) Why do businesses bother assigning costs to products? (5 marks)
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Management Accounting Information for Decision-Making and Strategy Execution
ISBN: 978-0137024971
6th Edition
Authors: Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young
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