ACC200 Introduction To Management Accounting

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Question:


Jackson Ltd manufactures MARTHA and FRED products. The overhead rate for the entire plant is based on direct labour hours.

FRED MARTHA

Production Quantity 1000 units to 5000 units

$40-60 for direct material

Direct labour 30 ( 2 hours) 45 (3 hours)

Manufacturing overhead 96 ( 2 hours) 144 (3 hours)

Manufacturing overhead can be calculated using a volume-based method using an overhead rate that is based on direct labour hours.

Costs related to machines $450,000

Installation and inspection 180,000

Plant-related costs 96,000

Total $816,000

Jackson currently prices its products at 120% total manufacturing cost. It has also noticed that a rival is producing MARTHA. Jackson’s accountant suggested Activity Based Costing. He provided the following details

Budgeted level for Activity Cost Pool Cost Driver

Machine-related costs Machine hours 9000 Hours

Inspection and setup Number of production runs 40

Costs associated with plant maintenance Square footage 1,920 sq. ft.

These are some additional details about the products:

Each FRED takes 4 hours of machine time, while each MARTHA takes 1 hour.

Each MARTHA is made in 50 units.

FREDs account for three quarters of engineering activity in terms of change orders.

It covers 1,920 square feet, of which 80 percent is used for the production of FREDs.

(a) Calculate FREDs and MARTHAs unit costs using the traditional approach to overhead calculation

(b) Calculate each activity’s cost per activity in the cost pool

Answer to Question: ACC200 Introduction To Management Accounting

Part A

Calculation of the total hours of direct labour

Name of the Product

Hours of total labour

Hours of total labour

Calculation of the predetermined overhead rate per hour

Budgeted manufacturing overhead = $816,000

Total labor hours = 17,000

Predetermined overhead rate = $816,000/17,000 = $48

Calculation of the predetermined overhead rate per unit

Name of the Product

Hours of labour required per unit

Overhead rate predetermined

Calculation of the cost per product using the traditional approach

Particulars

Direct Material

Part B

Calculation of the cost per activity for each activity pool

Activity cost pool

Budgeted Level

Machine-related costs

Hours of operation

9000 hours

Inspection and setup

Production runs

100 Change Orders

Costs related to plants

Space in square footage

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