ACW 2220 MANAGEMENT ACCOUNTING 1

SEMESTER 1, 2022
Tutorial 7 (Week 9)
Topic 7: Activity-Based Costing

Questions from the recommended textbook:

Horngren's Cost Accounting: A Managerial Emphasis, Global Edition 16th Edition

5-1, 5-2, 5-3, 5-12, 5-13, 5-22, 5-26, 5-31 and 5-32.

Additional Questions
Question 1

Empey Pty Ltd is a company that manufactures two different audio players: the MQ3 and ZT3
players. Both products go through three different processes: Assembly, Inspection and Despatch.
The company has total overheads of $691,200, of which $429,000 can be attributed to Assembly,
$207,000 relate to Inspection, and $55,200 to Despatch. Manufacturing overheads are currently
applied to units at $41.89 per machine hour
The following information has been obtained from the records:
MQ3 ZT3 Total
Direct material cost $25 $28
Direct labour cost $9 $11
Budgeted volume (units) 12,000 17,500
Processes:
- Assembly (machine hours) 6,000 10,500 16,500
- Inspection (labour hours) 4,120 1,400 5,520
- Despatch (shipments) 350 110 460

Required:
(a) Calculate the unit cost of MQ3 and ZT3 players using the current method of applying
manufacturing overhead

(b) Calculate the unit cost of MQ3 and ZT3 players using activity-based costing

(c) By how much is the cost of individual ZT3 players overstated or understated, when using the
current costing method?

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(d) If the company produces its budgeted volume, calculate the total overstatement or
understatement for the MQ3 and ZT3 product lines

(e) Both products have been selling for $65 each. Due to stiff competition the pricing of these
products has to be reconsidered. The sales manager has suggested that the selling price of the
MQ3 player be dropped to $62, and the ZT3 player should be discontinued. Briefly comment
on the sales manager’s suggestion.

(f) Briefly explain what is meant by the terms ‘volume-based cost driver’ and ‘activity driver’

Question 2
Mandy Moore is the new manager of Isla Consultant, a small company that provides consultancy
courses. The company offers two basic consultancy packages - two-day short courses and five-day
courses. Currently, Moore is reviewing the company’s total costs with the intention to set new
pricing for the coming year. Over the past 12 months, the company ran 30 two-day courses, with
an average of 50 participants, and 10 five-day courses, with an average of 30 participants. Total
costs amounted to $957,200. After several discussions with her assistant, Moore decided to base
prices for the coming year on the cost per day for last year plus a 20 percent profit margin.

The following activities and costs are available for last year:
Quantity of
Activity Driver
Activity Costs Activity Driver
Advertising $40,000 Number of courses 40
Enrol participants $16,200 Number of participants 1,800
Hire presenters $550,000 Number of days 110
Hire premises $30,800 Number of days 110
Hire audiovisual equipment $88,000 Number of days 110
Produce handouts $25,200 Number of participants 1,800
Lunches $207,000 Number of person-days 4,500
Total Costs $957,200

Required:
(a) Estimate the costs of a two-day course and a five-day course, using the average cost per day
approach (round to the nearest dollar).
(b) Estimate the cost of a two-day and a five-day course, using activity-based costing.
(c) Which cost in requirements (a) and (b) do you think would provide a more reliable basis for
cost-plus pricing? Why?

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Question 3
Prix Ltd is a plastic bathtubs manufacturer and produces only two types of products: Family and
Single plastic bathtubs. During the year 12,500 units of Family plastic bathtubs and 10,000 units
of Single plastic bathtubs were produced and total overhead costs of $150,000 were incurred.
Under the traditional costing system, total overhead costs are allocated to products based on the
direct labor hours.

The firm’s management accountant is advocating the use of activity-based costing (ABC) system
at Prix Ltd. He has collected the following information as a starting point for an ABC approach.

Budgeted factory overhead per annum:

Activities Cost per annum ($) Cost Driver

Stores administration 70,000 Number of different components
Production line set ups 30,000 Number of set ups

Dispatch 15,000 Number of dispatches

Other overheads 35,000 Direct labour hours

Estimated activities per annum for each type of product was as follows

Cost Driver Family Single

Number of components 400 600
Number of set ups 200 300
Number of dispatches 1,000 3,000
Direct labour hours 50,000 50,000

Required:
(a) Determine the overhead cost per unit of each product using the traditional costing system.
(b) Use an activity-based costing (ABC) approach to calculate the overhead cost per unit of
each product.
(c) Explain how the ABC approach is a better cost allocation system than the traditional costing
system.
(d) Discuss the implications of implementing the activity-based costing system at Prix Ltd.