Based on your knowledge of management accounting you are exploring the idea of using Activity Based costing
Question:
Based on your knowledge of management accounting you are exploring the idea of using Activity Based costing for applying overhead costs to products instead of traditional absorption costing method. You explain the concept behind ABC and Sophia has identified the following activity cost pools and activity measures:
Maintenance includes all costs incurred for the smooth operations of the café. (HINT: Think of all the manufacturing and non-manufacturing overheads that are utilized in regular operations of the café.) Total activity for each activity pool is as follows:
Sophia has asked for your help in formalizing business processes in a document form, so it will help owners monitor staff members and train new employees. You have been conducting interviews with the staff members at the cafe to document the processes for the owners. The following are your findings for the procurement process: Mr. Sheikh is responsible for procuring the raw materials from the wholesale market vendors on a bimonthly basis and the other vendors 2-3 times a week. The procurement of material is based on requirements generated by Mr. Sheikh based on the sales of the cafe. As the wholesale market dealings are usually in cash Mr. Sheikh draws the money from the cafe’s bank account and procures the material. To avoid sales tax the wholesalers don’t always provide a printed receipt for the materials purchased. Mr. Sheikh on his return from the market provides the receipts to the accountant.
Required:
1. Using first stage allocation, determine the amount of overheads assigned to each cost pool identified by Sophia.
2. Determining activity rates for each cost pool for second stage allocation using the ABC method.
Expert Answer:
Management Accounting
ISBN: 9781760421144
7th Edition
Authors: Kim Langfield Smith, Helen Thorne, David Alan Smith, Ronald W. Hilton
