Ahmad Limited manufactures only three (3) products: alpha, beta and gamma. The company uses the activity-based costing
Question:
Ahmad Limited manufactures only three (3) products: alpha, beta and gamma. The company uses the activity-based costing system with the four main cost drivers of activity noted in the table below. Any additional overhead costs are currently allocated using a plant-wide overhead rate based on direct machine hours. External consultants have recommended, however, that the company should switch to a traditional absorption costing system.
Production estimates for 2022 are as follows: 150,000 units of alpha, 55,000 units of beta and 85,000 of gamma. Each alpha unit requires one (1) direct labour hour and half an hour of machine time. Each beta unit requires two (2) direct labour hours and three and one-half (3.5) hours of machine time. Each gamma unit requires three (3) direct labour hours and one (1) hour of machine time to produce.
The direct material and direct labour costs included in the three products for 2021 are as follows:
Items | Alpha | Beta | Gamma |
Direct Material (per component) | $120 | $180 | $60 |
Direct Labour (per component) | $50 | $80 | $120 |
Management estimates that direct material costs will increase 10% in 2022 whilst direct labour costs will increase 5%.The budgeted (estimated) total factory overhead data for 2022 is given as:
Items | Budgeted Overhead ($) | Estimated Volume Level |
Production Set-Ups | $13,480,000 | 80 Set-Ups |
Material Handling | $9,570,000 | 25,000 kgs |
Packaging and Shipping | $8,520,000 | 18,000 boxes |
Transportation Trips | $5,250,000 | 800 trips |
Total Factory Overhead | $41,970,000 |
Based on analysis of the consultants of the four overhead activities, it is estimated the production activities in 2022 will be as follows for alpha and beta with balance to gamma:
Activity | Alpha | Beta |
Production Set-Ups | 35 Set-Ups | 15 Set-Ups |
Material Handling | 7,000 kgs | 10,000 kgs |
Packaging and Shipping | 5,000 boxes | 7,000 boxes |
Transportation Trips | 250 trips | 400 trips |
Required:
- Calculate the cost of all products based on a traditional plant-wide rate using direct labor costs to assign overheads.
- Cost the three products using an activity-based costing system.
Taxation for Decision Makers 2014
ISBN: 9781118654545
6th edition
Authors: Shirley Dennis Escoffier, Karen Fortin