Fashion Limited produces three clothing products, the standard cost of which are shown below: Jumper Trousers Blouse
Question:
Fashion Limited produces three clothing products, the standard cost of which are shown below:
Jumper | Trousers | Blouse | ||||
€ | € | € | ||||
Direct Material | 20 | 20 | 15 | |||
Direct Labour | 30 | 40 | 50 | |||
Production overhead * | 30 | 50 | 35 | |||
Standard production cost per unit | 80 | 110 | 100 | |||
Units produced and sold | 10,000 | 10,000 | 20,000 |
The company wishes to introduce Activity Based Costing (ABC) and has identified 2 main activities, production set-up and orders handling. Information on these activities and their associated cost drivers are set out below:
Activity Cost driver Expenses
Production set-up No. of set-ups €1,500,000
Orders handling No. of orders handled €300,000
Additional information provided by the management accountant is as follows for the period in question:
Jumper Trousers Blouse
No. of sets ups 12 16 20
No. of orders handled 200 300 1,000
Requirement
- From the information given, calculate the Activity Based Cost of each of the three products Jumper, Trousers
and Blouse. (30 marks)
- Comment on the differences between Standard Costing and Activity Based Costing cost per unit and advise the management accountant because they are different. What decision or actions can he take now that he is aware of
the ABC cost per unit. (10 Marks)
- Advise the management accountant of the objective, merits, and limitations of Activity Based Costing.
"a.Prepare the annual pro forma financial statements that you would expect Mary to prepare based on her comments about her expectations for the business. Assume no principal will be repaid on the loan.
b.Review the statements you prepared for the first requirement and prepare a list of reasons why actual results for Mary and Jason’s business probably will not match their budgeted statements"
Fundamental Managerial Accounting Concepts
ISBN: 978-1259569197
8th edition
Authors: Thomas Edmonds, Christopher Edmonds, Bor Yi Tsay, Philip Olds