Pastels Incorporated produces two products, Pink and Lemon. The manufacture of both products is undertaken in...
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Pastels Incorporated produces two products, Pink and Lemon. The manufacture of both products is undertaken in two departments, Machining (which is totally automated), and Assembly (which is totally manual). Budgeted production data for these two products in the forthcoming period are provided in Exhibit 5. Exhibit 5 Budgeted Production Data for Pastels Inc. Pink 50,000 32 2 Production (units) Prime cost ($ per unit) Time in Machining department (machine hours per unit) Time in Assembly department (direct labour hours per unit) Machining Services Pastels Incorporated uses normal costing and departmental overhead allocation rates. Overheads are allocated to product costs on the following basis: $1.10/machine hour for work done in the Machining Department and $0.75/direct labour hour for work done in the Assembly Department. Assembly Services Exhibit 6 Activity Based Cost Pools and Corresponding Cost Drivers for the forthcoming period Cost Pool Set-up costs Order processing Purchasing Cost ($) 255,000 282,000 16,000 77,000 7 52,500 Cost Driver Machine Hours Direct Labour Hours Set-ups Lemon 40,000 84 5 Customer orders 3 Suppliers' orders Quantity of Cost Driver 300,000 470,000 320 16,000 7,000 Because of an increasingly competitive market, Pastels Incorporated decides to switch to activity based costing. It ascertains that the above overheads could be re- analysed into "activity cost pools' as shown in Exhibit 6 (on previous page). The activity estimates per product for the forthcoming period are displayed in Exhibit 7. Exhibit 7 Activity Estimates for the Forthcoming Period Number of set-ups Number of Customer Orders Number of Suppliers' Orders Activity estimates per product Pink Lemon 120 200 8,000 3,000 8,000 4,000 Required: Calculate the unit product costs for Pink and Lemon under the current costing system which uses departmental overhead allocation rates. (3 marks) Calculate the unit product costs for Pink and Lemon under activity based costing. (10 marks) Why would "an increasingly competitive market" provide the impetus for Pastel Incorporated to consider using activity based costing? (3 marks) Should Pastels Incorporated change to activity based costing? Explain why or why not. (4 marks) Pastels Incorporated produces two products, Pink and Lemon. The manufacture of both products is undertaken in two departments, Machining (which is totally automated), and Assembly (which is totally manual). Budgeted production data for these two products in the forthcoming period are provided in Exhibit 5. Exhibit 5 Budgeted Production Data for Pastels Inc. Pink 50,000 32 2 Production (units) Prime cost ($ per unit) Time in Machining department (machine hours per unit) Time in Assembly department (direct labour hours per unit) Machining Services Pastels Incorporated uses normal costing and departmental overhead allocation rates. Overheads are allocated to product costs on the following basis: $1.10/machine hour for work done in the Machining Department and $0.75/direct labour hour for work done in the Assembly Department. Assembly Services Exhibit 6 Activity Based Cost Pools and Corresponding Cost Drivers for the forthcoming period Cost Pool Set-up costs Order processing Purchasing Cost ($) 255,000 282,000 16,000 77,000 7 52,500 Cost Driver Machine Hours Direct Labour Hours Set-ups Lemon 40,000 84 5 Customer orders 3 Suppliers' orders Quantity of Cost Driver 300,000 470,000 320 16,000 7,000 Because of an increasingly competitive market, Pastels Incorporated decides to switch to activity based costing. It ascertains that the above overheads could be re- analysed into "activity cost pools' as shown in Exhibit 6 (on previous page). The activity estimates per product for the forthcoming period are displayed in Exhibit 7. Exhibit 7 Activity Estimates for the Forthcoming Period Number of set-ups Number of Customer Orders Number of Suppliers' Orders Activity estimates per product Pink Lemon 120 200 8,000 3,000 8,000 4,000 Required: Calculate the unit product costs for Pink and Lemon under the current costing system which uses departmental overhead allocation rates. (3 marks) Calculate the unit product costs for Pink and Lemon under activity based costing. (10 marks) Why would "an increasingly competitive market" provide the impetus for Pastel Incorporated to consider using activity based costing? (3 marks) Should Pastels Incorporated change to activity based costing? Explain why or why not. (4 marks)
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5 Under Current System Pink Lemon Production Units 50000 40000 Prime Cost 1600000 3360000 Machine Cost 110000 220000 300000 Assembling Cost 262500 900... View the full answer
Related Book For
Cornerstones of Cost Management
ISBN: 978-1285751788
3rd edition
Authors: Don R. Hansen, Maryanne M. Mowen
Posted Date:
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