ACC804 Revision Questions

Conventional and Activity-based product costing: manufacturer

1 Overhead to be assigned to film development chemical order:

Cost per unit of

Activity activity driver Level of activity driver Assigned overhead cost
Machine setups $2000 per setup 4 setups $ 8000
Material handling $2 per kg 10 000 kg 20 000
Hazardous waste control $5 per kg 2000 kg 10 000
Quality control $75 per inspection 10 inspections 750
Other overhead costs $10 per machine hour 500 machine hrs 5 000
Total $43 750
$43 750
2 Overhead cost per box of chemicals= = $43.75 per box
1000 boxes
total budgeted overhead cost
3 Predetermined overhead rate=
total budgeted machine hours
$625 000
=
20 000
=$31.25 per machine hour

4 Overhead to be assigned to film development chemical order, given a single predetermined overhead rate:
(a) Overhead assigned=$31.25 per machine hour @ 500 machine hours
=$15 625 in total
$15 625
(b) Overhead cost per box of chemicals= = $15.625 per box
1000 boxes
=$15.625 per box
5 The production of film development chemicals entails a relatively large number of machine setups, a large
amount of hazardous materials and several inspections. Thus, they are quite costly in terms of driving
overhead costs. Use of a single predetermined overhead rate obscures this characteristic of the production job.
Underestimating the overhead cost per box could have adverse consequences for Halifax. For example, it
could lead to poor decisions about product pricing. The simple activity-based costing system for overhead
will serve management much better than the system based on a single, predetermined overhead rate.

6 Calculation of overhead assigned to photographic plates:

Activity Cost per unit of Level of Assigned overhead cost
Machine setups activity
$2000 perdriver
setup activitydriver
2 setups $4000
Material handling $2 per kg 800 kg 1600
Hazardous waste control $5 per kg 300 kg 1500
Quality control $75 per inspection 3 inspections 225
Other overhead costs $10 per machine hour 50 machine hours 500
Total $7825
$7825
Overhead cost per unit =
100 plates
=$78.25
 Calculation of unit cost, per plate:
Direct material $120.00
Direct labour 40.00
Manufacturing overhead 78.25
Total cost per plate $238.25

JIT Implementation: manufacturer

The net cash savings realised by Farm Fresh Ltds Service Division as a result of the JIT inventory program is $86
000, computed as follows:
Cash savings
(loss)
Funds released from inventory investment $800 000
Interest 0.15 $120 000
Insurance savings ($160 000 0.60) 96 000
Warehouse rental revenue [(8000 m 0.75) $5.00 per m ]
2 2 30 000
Warehouse rental cost: no effect
Transferred employees: no effect
Contribution of lost sales (3800 units at $20.00)* (76 000)
Overtime premium (7500 units at $11.20) (84 000)
Net cash savings $86 000
* Calculation of unit contribution margin:
Revenue ($12 320 000 280 000 units) $44.00
Less variable costs:
Cost of goods sold ($5 320 000 280 000 units) $19.00
Selling and administrative expenses ($1 400 000 280 000 units) 5.00 24.00
Contribution margin $20.00
The incremental cost of $11.20 per unit for overtime is less than the additional $20.00 per unit contribution for the

7500 units that would have been lost sales. Therefore, the overtime hours should be used.

Target costing: manufacturer

1 The target cost for the Glammaglob gadget would be $200 ($250 selling price $50 profit).
2 The target profit is $50.
3 The target price is $250
4 If the estimated unit cost of the gadget is $230, then our cost reduction objective is $30 (the amount by which
the estimated cost exceeds the target costs). In order to apply the concept of target costing to achieve the
objective, the company should set up a cross-functional team to investigate possible cost savings in the area
of product design, manufacturing process and material costs and obtain a commitment from each functional
department about the amount of cost saving they can achieve to help lower the current cost to the target cost.

(Acknowledgment: All questions are adapted from Langfield-Smith, 2012 Management Accounting 6E)