Question

Southcott co is a firm of financial consultants which offers short revision courses on taxation and auditing for professional examinations. The firm has budgeted annual overheads totaling $152,625. Until recently the firm has applied overheads on a volume basis, based on the number of course days offered. The firm has no variable costs and the only direct costs are the consultants' own time which they divide equally between their two courses. The following information relates to the past year and is expected to remain the same for the coming year. Course No. of courses sold Duration of course No. of enquiries No. of brochures Auditing 50 2 days 175 300 Taxation 30 3 days 70 200 All courses run with a maximum number of students (30), as it is deemed that beyond this number the learning experience is severely diminished, and the same center is hired for all courses at a standard daily rate. The firm has the human resources to run only one course at any one time. Required 1. Calculate the overhead cost per course for auditing using traditional volume based absorption costing to the nearest dollar. 2. The firm is considering the possibility of adopting an activity-based costing (ABC) system and has identified the overhead costs as shown below. Details of overheads $ Center hire 62,500 Enquiries administration 27,125 Brochures 63,000 Total 152,625 Calculate the overhead cost of center hire which would be allocated to an auditing course under activity based costing to the nearest dollar. 3. Calculate the overhead cost of brochure printing which would be allocated to a taxation course under activity based costing to the nearest dollar. 4. Calculate the overhead cost of enquiries administration which would be allocated to a taxation course under activity based costing. 5. A member of Southcott Co.’s finance team has said that activity based costing (ABC) provides more accurate product costs than a traditional absorption costing system. He gave a number of statements supporting this claim. Which of the following statements does not support his claim?

Answer 1

	The firm has applied the OH rate under absorption costing based on volume
	Total No of Course Days
		No of courses	No of Days	Total no of course days
	Auditing	50	2 days	100
	Taxation	30	3 days	90
	Total	80		190 days
	Total OH Cost		$152,625
	OH rate per course day		$152625/190 days
			$803.29 per course day
1	Calculation of the OH cost per course for auditing under the traditional volume based absorption costing
	Particulars	No of Course days-A	rate per course day-B	Total OH allocation =A*B
	Auditing	100	$803.29	$80,329.00
	Taxation	90	$803.29	$72,296.10
				$152,625.10
	Overhead cost per course	Auditing	$80,329
		Taxation	$72,296.10
2	For Activity based costing cost driver used
		Cost Driver
	For cost hire	No of Course days
	For Enquiries
	administration	No of Enquiries
	For Brochure	No of Brochures
a	calculation of OH cost of Center Hire
	OH	$62,500	A
	Total Course Days	190 days	B
	Cost per course day	$328.95 per course day	A/B
b	calculation of OH cost of Enquiry Administration
	OH	$27,125
	Total no of Enquiries	175+70	245
	Cost per Enquiry	$110.71 per enquiry
c	Calculation of OH cost of Brochure
	OH	$63,000
	Total No of brochures	300+200
		500
	Cost per brochure	$126 per brochure
		Allocation of OH under ABC
		Auditing & Taxation
	Cost Hire	No of Course day * Cost per course day
	Audit	100*328.95	$32,895
	Taxation	90*328.95	$29,605.50
		Total	$62,501
	Enquiries Administration	No of Enquiries * Cost per enquiry
	Audit	175*110.71	$19,374.25
	Taxation	70*110.71	$7,749.70
		Total	$27,123.95
	Brochure	No of Brochures * Cost per brochure
	Audit	300*126	$37,800
	Taxation	200*126	$25,200
		Total	$63,000
		Audit	Taxation
	Cost Hire	$32,895	$29,605
	Enquiries Administration	$19,375	$7,750
	Brochures	$37,800	$25,200
	Total OH per course	$90,070	$62,555