Skhumbuzo is a private business man who began his trade by operating a spaza shop in the vicinity of the University of Eswatini in the area of Kwaluseni. His business has a special focus on three hot dog product lines. his business has grown so much in recent months such that it is now competing at same level in the Kwaluseni area with established supermarket chains such as Pick'n Pay and OK bazaars. Due to this growth overheads have become a significant proportion of the business costs.

He recently hired Mpendulo an MBA student at the University of Eswatini as the finance manager. Mpendulo decided to implement cost accounting policies in relation to overheads that he learnt from his MBA cost accounting classes. He first experimented with traditional cost accounting policy. he decided to absorb overheads on the basis of direct labour hours. however, from his classes he learnt htat a cost accounting called ABC is quite superior to the traditional cost accounting system. Unfortunatel he did not grasp the concepts very well.

You have been asked to help him implement the ABC system. the following information has been made available for you:

                                                                  Wors Dog                         Russian Dog                 Eswatini Dog

Material ($12 per kilo)                                    $36                                    $18                             $24

Labour ($9 per hour)                                      $9                                       $18                            $13.50

Machine hours per unit                                6 minutes                            12 minutes                 6 minutes

Units per batch                                             40                                        60                             60

Sales price                                                  $63                                       $58                           $60

Sales demand                                            3,200                                    3,600                         4,500

Overhead Costs:

Machine related                                                $74,500 driven by machine hours

Quality testing                                                  $17,145 driven by number of units

Machine set-up costs                                        $54,825 driven by number of batches

Material movements                                          $60,000 driven by number of kilos

Required:

(a) Determine the profit or loss on each hot dog using the traditional absorption costing system

(b) Calculate the profit and loss on each product using the ABC system?

(c) Give recommendations on which is a better sytsem of the two

Answer rating: 100% (QA)

To determine the profit or loss on each hot dog using the traditional absorption costing system we need to allocate the overhead costs based on the direct labor hours Lets calculate the cost per unit ... View the full answer