XYZ Ltd. manufactures three products A, B, and C, and has experienced a decrease in profits...

  

 

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XYZ Ltd. manufactures three products A, B, and C, and has experienced a decrease in profits despite increasing sales. The company has allocated overhead using machine hours but is currently considering introducing activity-based costing (ABC). In 2020, the company had the following revenues and expenses. Product A Product B Product C Total Sales £800,000 £1,000,000 £1,100,000 £2,900,000 Direct costs Direct materials £350,000 £100,000 £500,000 £1,250,000 £180,000 £400,000 Direct labour £30,000 £50,000 Variable overhead Machine setup Order processing Warehousing costs Depreciation of machines Shipping Contribution Fixed overhead £50,000 £100,000 £280,000 £200,000 £70,000 £770,000 Plant administration £200,000 £300,000 £270,000 Other fixed overhead Profit Machine hours per unit Labour hours per unit Production (units) 2.0 4.0 6.0 5.0 4.0 2.5 7,000 5,000 11,000 23,000 Overheads have been analysed into different activities, and the following costs and relevant cost drivers have been identified by activity. Regardless of the cost allocation method, plant administration and other fixed overhead costs are not allocated to products. Activity Level Activity Cost driver Product Product Product A в Machine setup Order processing Number of sales orders Number of production runs 20 30 50 15,000 25,000 10,000 received Warehousing costs Number of units held in 200 200 400 inventory Depreciation Machine hours Shipping Number of units shipped 6,000 9,000 20,000 (a) Using examples, describe two potential benefits and one cost factor of adopting АВС. (6 marks; max 210 words) What would be the benefits of ABC for this company in particular? Ensure that you explain the benefits based on how high-volume products "subsidise" low-volume products under the traditional absorption costing and how ABC considers complexity in the operation. (6 marks; max 210 words) (b) Using the information provided above: (i) Complete the income statement using machine hours to allocate variable overhead. Ensure that you explicitly show the absorption overhead rate in your working. (6 marks) (ii) Complete the income statement using the activity cost drivers analysed above. Ensure that you explicitly show the activity overhead rates in your working. (20 marks) XYZ Ltd. manufactures three products A, B, and C, and has experienced a decrease in profits despite increasing sales. The company has allocated overhead using machine hours but is currently considering introducing activity-based costing (ABC). In 2020, the company had the following revenues and expenses. Product A Product B Product C Total Sales £800,000 £1,000,000 £1,100,000 £2,900,000 Direct costs Direct materials £350,000 £100,000 £500,000 £1,250,000 £180,000 £400,000 Direct labour £30,000 £50,000 Variable overhead Machine setup Order processing Warehousing costs Depreciation of machines Shipping Contribution Fixed overhead £50,000 £100,000 £280,000 £200,000 £70,000 £770,000 Plant administration £200,000 £300,000 £270,000 Other fixed overhead Profit Machine hours per unit Labour hours per unit Production (units) 2.0 4.0 6.0 5.0 4.0 2.5 7,000 5,000 11,000 23,000 Overheads have been analysed into different activities, and the following costs and relevant cost drivers have been identified by activity. Regardless of the cost allocation method, plant administration and other fixed overhead costs are not allocated to products. Activity Level Activity Cost driver Product Product Product A в Machine setup Order processing Number of sales orders Number of production runs 20 30 50 15,000 25,000 10,000 received Warehousing costs Number of units held in 200 200 400 inventory Depreciation Machine hours Shipping Number of units shipped 6,000 9,000 20,000 (a) Using examples, describe two potential benefits and one cost factor of adopting АВС. (6 marks; max 210 words) What would be the benefits of ABC for this company in particular? Ensure that you explain the benefits based on how high-volume products "subsidise" low-volume products under the traditional absorption costing and how ABC considers complexity in the operation. (6 marks; max 210 words) (b) Using the information provided above: (i) Complete the income statement using machine hours to allocate variable overhead. Ensure that you explicitly show the absorption overhead rate in your working. (6 marks) (ii) Complete the income statement using the activity cost drivers analysed above. Ensure that you explicitly show the activity overhead rates in your working. (20 marks)

Answer rating: 100% (QA)

a POTENTIAL BENEFITS i Helps in decision making by reflecting the total cost of the product ii Helps ... View the full answer