Stylish Ltd sells two models of coffee tables: Casual and Deluxe. Direct materials inventory and finished goods inventory are costed using the first-in first-out (FIFO) method. Unit costs of direct materials purchased and unit costs of finished goods sold remain unchanged throughout
the budget year. There are two types of direct materials namely XX and YY; XX is the material used as the legs of the table and YY is the materials used as the surface top of the table. The height of the table is one meter. Direct manufacturing labour workers are hired on an hourly basis and no overtime is normally allowed for. Frank Morton, one of the workers, who frequently exceeds 40 hours per week, thus receiving overtime. The CEO Luis Franco and Julius Frino, the manufacturing manager is generally happy with Frank’s works, but the manager talks to Frank constantly about working more quickly. Frank’s overtime causes the actual direct labour costs to exceed the direct labour cost budget almost every month (reporting period). Direct manufacturing labour-hours is the cost driver for the variable portion of manufacturing operations overhead. The fixed component of manufacturing operations overhead is tied to the manufacturing capacity of 300,000 direct manufacturing labour-hours that Stylish has planned for 2017. Setup labour-hours is the cost driver for the variable portion of machine setup overhead. The fixed component of machine setup overhead is tied to the setup capacity of 15,000 setup
labour-hours that Stylish has planned for 2017. There are two cost drivers for manufacturing overhead costs – direct manufacturing labour-
hours and setup labour-hours. Stylish allocates all (variable and fixed) manufacturing overhead costs using direct manufacturing labour hours and machine setup overhead costs using setup labour-hours. The manufacturing direct labour hours overhead costs budget for the year ending 30 June 2017 is $9,000,000 and the machine setup overhead costs budget is $3,000,000. Stylish Ltd applies activity-based budgeting whereby the number of ‘Casual’ tables to be produced in batch is 50 while the number of ‘Deluxe’ tables to be produced in batch is 40. The setup time per batch is 10 hours for ‘Casual’ table and 12 hours for ‘Deluxe’ table. Non-manufacturing costs consist of product design, marketing, and distribution costs. All product design costs are fixed costs for 2017. The variable component of marketing costs equals the 6.5% sales commission on revenues paid to salesperson. The variable portion of distribution costs is $2 per cubic meter of tables moved.


1. The CEO, Luis Franco, and the financial controller, Arthur Batten, are currently evaluating the usefulness of Activity based costing (ABC). Provide an argument for and against the benefits of ABC. The arguments must be backed up by peer review journals and articles from the CPA/CA journals only.
2. Luis Franco is concerned that his manufacturing manager Julius Frino is not familiar with the Industrial award that should be used for his staff. Find an appropriate award and provide a summary of the hourly wages/weekly wages and associated penalties inclusion overtime.
3. Discuss the results of sensitivity analysis of the changes in the selling prices (Casual and Deluxe type) and costs of raw materials (XX and YY) have on the operating income of Stylish Ltd. The workings, as well as the master budget (operating budget) needed for Stylish Ltd, should be included at the back of the assignment as the appendix and excluded in the word count.
4. Suggest what might be done to solve the problem or improve the situation of Frank Morton.

Answer rating: 100% (QA)

ANSWERS 1 Activitybased costing is a costing technique that assigns overhead and oblique fees to associated services and products This accounting technique of costing recognizes the connection among p... View the full answer