Traditional and Activity-Based Costing - Sewing Easy Ltd
University: Melbourne Business School
Question :
This unit is based on Sewing Easy Ltd which is dealing in manufacturing sewing machines in the recent year they earned high profit thus they planned to expand business activity.
- Determine the cost per unit of basic and advance models under current traditional costing system.
- Analyze basic and advance models under Activity-based costing system.
- Explain major reason in the context of overseas buyers for buying advanced model.
- Explain reasons on the basis of the same overheads and recommending ways for dealing with its fluctuations.
- What is the Merit and demerits of activity-based costing system?
Answer :
INTRODUCTION
Management accounting can be referred as process of preparing accounts and reports which will be helping manager for finding financials which are accurate and even the information which will be useful for short term decision making such as statistical information. On the perspective of business unit, better planning has been ensured by management accounting and proper control over the organization. This report is totally based on case scenario of Sewing easy ltd whose business model can be described as basic and advanced especially in manufacturing context. The main objective of organization is to enhance the base of customer and profit level should be maximised as each business units has a desire to explore there operations at global level. This report is giving very deep insight about two methods i.e. traditional based costing and activity-based costing. The report will be elaborating there merits as well as demerits.
Q1 Cost per unit of basic and advance models under current traditional costing system
Traditional costing system
|
Particulars |
Amount of basic model |
Amount of advance model |
|
Manufacturing overhead |
250000 (working note 1) |
451700 (Working note 2) |
|
Labour cost (Working note 3) |
240000 |
390000 |
|
Overhead rate |
$1.04 |
$1.16 |
Working notes
W.N 1 Representation of total indirect overheads (Basic model)
W.N 2 Representation of total indirect overhead cost by taking consideration of operating expenses (Advance model)
W.N 3 Aggregate of labour cost
Q2 Cost per unit of basic and advance models under Activity-based costing system
Assessing unit cost on the basis of activity based costing
|
Particulars/Relevant cost drivers |
Overhead costs |
Sum of activities |
Overhead cost/ sum of activity ($) |
|
Inspection |
20000 |
950 |
21.05 |
|
Assembly |
90000 |
8000 |
11.25 |
|
Production scheduling |
105000 |
550 |
190.91 |
|
Machine set up |
35000 |
350 |
100 |
|
A |
Activity rate |
|
B |
Activity usage by basic model |
|
C |
Activity Cost Assigned to basic model [C = (A * B)] |
|
D |
Activity usage by advance model |
|
E |
Activity cost assigned to advance model [E =(A * D)] |
|
Particulars |
Total Indirect / overhead costs($) |
Total of activities |
A ($) |
B |
C ($) |
D |
E ($) |
|
Inspection |
20000 |
950 |
21.05 |
200 |
4210.53 |
750 |
15789.47 |
|
Assembly |
90000 |
8000 |
11.25 |
4600 |
51750 |
3400 |
38250 |
|
Production Scheduling |
105000 |
550 |
190.91 |
50 |
9545.45 |
500 |
95454.55 |
|
Machine set-up |
35000 |
350 |
100 |
100 |
10000 |
250 |
25000 |
|
Selling and administration |
140600 |
140600 * 36% = 50616 (Working note 4) |
|||||
|
Interest |
25200 |
25200 * 6% = 1512 (Working note 4) |
|||||
|
Rent of office |
35900. |
35900 * 9% = 3231 (Working note 4) |
|||||
|
Aggregate overhead cost |
Figures in |
75505.98 |
229853 |
||||
|
Per unit (overhead cost) |
75505.98 / 1600 = 47.19 |
229853 / 1500 = 153.24 |
W.N 4
|
Particulars |
Total Indirect / overhead costs ($) |
Cost of labor |
|
|
Selling and administration |
140600 |
390000 |
36.00% |
|
Interest |
25200 |
390000 |
6.00% |
|
Office rent |
35900 |
390000 |
9.00% |
Consumption of unit cost of advanced model
|
Basic model ($) |
Advance model ($) |
|
|
Cost per unit of direct material |
325 |
560 |
|
Cost per unit of direct labour |
150 |
260 |
|
Cost of overhead |
47.19 |
153.24 |
|
Unit cost |
522.19 |
973.24 |
UPTO
56%
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