PolyPlas Engineering Company Ltd manufactures plastic components for the car industry. The usual approach to overhead...

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PolyPlas Engineering Company Ltd manufactures plastic components for the car industry. The usual approach to overhead allocation adopted by the company, using machine hours as the sole cost driver, results in the following total cost per unit: 124.6 for product X; 115.11 for product Y and 159.6 for product W. The above product specifications are key plastic component of the car industry. However, a recently recruited management accountant of the company is concerned about the company's sole reliance on a volume-driven allocation base and suggested to management the need for him to be allowed to prepare an ABC analysis of product costs for the company's directors, and to make some recommendations based on his findings. The accountant relied on the following available budgeted information for the three key plastic components of the company to present the activity-based cost analysis. W per unit X Y per unit per unit Selling price 200 183 175 Direct material + 50 40 35 Direct labour 30 35 30 20 000 Units produced and sold 36 000 The total number of activities for each of the three products for the period is as follows: 30 000 + Number of purchase requisitions Number of set-ups W X 2 400 3 600 Y 4 000 480 520 600 Overhead costs have been analysed as follows: Receiving/inspecting quality assurance Production scheduling/machine set-up 2 800 000 2 400 000 Required: (a) Calculate the total cost per unit of each product using an ABC approach. You should use your judgement to choose suitable cost drivers, based on the information provided in the question. (b) Calculate the budgeted profit per unit for each of the three products using activity-based budgeting and traditional costing. (c) By comparing the solutions between (a) and the volume-driven total cost per unit for the three key plastic components, briefly explain how ABC can address the distortions of product costing linked to traditional cost accounting. (d) Traditional costing system can make a considerable contribution to the under costing and over costing of products. Briefly discuss the effect of the above on sales and market. PolyPlas Engineering Company Ltd manufactures plastic components for the car industry. The usual approach to overhead allocation adopted by the company, using machine hours as the sole cost driver, results in the following total cost per unit: 124.6 for product X; 115.11 for product Y and 159.6 for product W. The above product specifications are key plastic component of the car industry. However, a recently recruited management accountant of the company is concerned about the company's sole reliance on a volume-driven allocation base and suggested to management the need for him to be allowed to prepare an ABC analysis of product costs for the company's directors, and to make some recommendations based on his findings. The accountant relied on the following available budgeted information for the three key plastic components of the company to present the activity-based cost analysis. W per unit X Y per unit per unit Selling price 200 183 175 Direct material + 50 40 35 Direct labour 30 35 30 20 000 Units produced and sold 36 000 The total number of activities for each of the three products for the period is as follows: 30 000 + Number of purchase requisitions Number of set-ups W X 2 400 3 600 Y 4 000 480 520 600 Overhead costs have been analysed as follows: Receiving/inspecting quality assurance Production scheduling/machine set-up 2 800 000 2 400 000 Required: (a) Calculate the total cost per unit of each product using an ABC approach. You should use your judgement to choose suitable cost drivers, based on the information provided in the question. (b) Calculate the budgeted profit per unit for each of the three products using activity-based budgeting and traditional costing. (c) By comparing the solutions between (a) and the volume-driven total cost per unit for the three key plastic components, briefly explain how ABC can address the distortions of product costing linked to traditional cost accounting. (d) Traditional costing system can make a considerable contribution to the under costing and over costing of products. Briefly discuss the effect of the above on sales and market.

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PolyPlas Engineering Company Ltd ABC Analysis a Total Cost per Unit using ABC Approach Identify Cost Drivers ReceivingInspecting Quality Assurance Lik... View the full answer