activity based costing in decision making

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Task 1 Activity-Based Costing Objective To enable the learner to differentiate between traditional costing and activity based costing in decision making. Marks allocated 30 marks QUESTION Persiaran Sdn. Bhd. makes a product in two qualities, called ‘Basic’ and ‘Super’. The business is able to sell these products at a price that gives a standard profit mark-up of 25 per cent of full cost. Full cost for one unit is calculated by charging overheads to each type of product on the basis of direct labour hours. The costs are as follows: Basic (RM) Super (RM) Direct labour (RM 10 per hour) Direct material 40 15 60 20 The total overhead are RM1,000,000 Based on experience over recent years, in the forthcoming year the business expects to make and sell 40,000 Basics and 10,000 Supers. Recently, the management has undertaken an exercise to identify cost drivers based on various activities. The finding has revealed that following analysis of the annual overhead: Activity (and cost driver) Cost (RM) ‘000 Annual number of activities Total Basic Super Number of machine set-ups 280 100 20 80 Number of quality-control inspections 220 2,000 500 1,500 Number of sales orders processed 240 5,000 1,500 3,500 General production (machine hours) 260 500,000 350,000 150,000 Total 1,000 Required: a) Determine the full cost and selling price of each of the two products based on the present costing system. (10 marks) BMAC5203/MAY15/SIMAD b) Determine the full cost and selling price of each product on an activity-based costing basis, taking accounting of the management’s recent investigation. (10 marks) c) What conclusions can you draw? What advice would you offer the management of the business? (10 marks) Task 2 Profit Planning and Budgetary Control System Objective To enable the learner to prepare the whole master budget of an organisation. Marks allocated 40 marks QUESTION Berjaya Sdn. Bhd. Is preparing budgets for the quarter ending September 30. Related information is shown as below:  Budgeted sales for the next few months are: May 15,000 units June 20,000 units July 30,000 units August 40,000 units September 50,000 units October 35,000 units November 25,000 units  The selling price is RM12 per unit.  All sales are on credit and the collection methods are: (i) 50% collected in the month of sales (ii) 30% collected in the month following sales (iii) 20% collected in two month following sales  The management at Berjaya Sdn. Bhd. determines the ending inventory in units to be equal to 20% of the following month’s budgeted sales.  To product one unit of output, 2 kilograms of direct material are needed.  Berjaya decides to have direct materials on hand at 10,000 kgs every month  Cost of direct material is estimated at RM1.50 per kg.  The payment of direct materials is below: (i) 50% purchases is paid in the month of purchase (ii) 50% purchases is paid in the following month of purchase  To product one unit of output, 0.1 hours of direct labor is required.  Berjaya pays RM8 per hour to its direct labor.  All wages are paid at the end of the month  Manufacturing is divided into variable and fixed overhead.  Variable overhead is applied to each units of output on the basis of direct labor hours.  The variable overhead rate is RM10 per direct labor hour.  Fixed overhead is estimated at RM40,000 cash per month.  Ending Finished Goods Inventory is made up from direct material, direct labor and manufacturing OH.  Cost of Goods sold is computed based on the unit production cost RM5.79 per unit.  Selling and administrative cost is divided into variable and fixed components.  Variable selling and administrative costs is estimated at RM1.50 per unit sold. BMAC5203/MAY15/SIMAD  Fixed selling and administrative cost is estimated at RM50,000 per month, where RM5,000 is depreciation and not cash expense.  Berjaya identifies the cash policy as follows: (i) Minimum cash balance of RM50,000 is required for every month (ii) Any deficiency of cash, will be making up by loans and repays back at the following month. (iii) The interest on loan is charged at 15% per year. (iv) Purchase an equipment in August totaling RM150,000 (v) Beginning balance of cash balance on 1 July is RM55,000  Berjaya’s account balances as follows: Property RM 458,047.50 Equipment 150,200 (net) Ordinary Shares 500,000 Retained earnings 335,777.50 Required: To prepare the whole master budget (Sales budget up to budgeted Statement of Financial Position) for Berjaya Sdn. Bhd. for July, August and September. (40 marks) Task 3 Short Term Decision Making Objective To enable the learner to identify relevant and irrelevant costs and benefits associated to assist in decision making. Marks allocated 30 marks QUESTION Builders SdnBhd offers three products for the construction industry: blocks, bricks and tiles. The following income statement shows the projected results, by products, for 2010 (in RM thousands) : BLOCKS (‘000) BRICKS (‘000) TILES (‘000) TOTAL Sales revenue RM500 RM800 RM150 RM1450 Less: Variable expenses 250 480 140 870 Contribution margin 250 320 10 580 Less direct fixed expenses: Advertising 10 10 10 30 Salaries 37 40 35 112 Depreciation 53 40 10 103 Total direct expenses 100 90 55 245 PRODUCT margin RM 150 RM230 RM(45) RM335 Less: common fixed expenses 125 Operating income RM210 This is the third consecutive year that the tiles segment is reporting losses. The managing director is considering dropping the product line as it would mean saving RM45,000 by dismissing the line’s supervisor and also eliminating depreciation. BMAC5203/MAY15/SIMAD (a) Do you agree that the tiles division should be closed based on the above information? (14 marks) (b) What qualitative factors would need to be considered before a decision on whether to keep or drop a product is adopted? (6 marks) (c) The marketing manager suggested that if the tile product is dropped, sales and variable costs of blocks would reduce by 10%, and sales and variable costs of bricks by 8% since customers tend to buy all three products together. Hence if the tile product is dropped, customers will buy blocks and bricks elsewhere. Does this mean it is better to keep the tile product line? (10 marks) (TOTAL: 100 MARKS

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