Question

Question 1
Background

Packit Ltd stores finished products in bulk on behalf of its customers. When the products are required for
sale Packit Ltd packs them in accordance with its customers' instructions. The company is currently in the
process of determining budgeted costs by customer category for the forthcoming financial year.

Packit Ltd categorises its customers according to the relative fragility of their products. It has three
customer categories: Robust, Standard and Delicate. As the names suggest, the customers in the Robust
category have the most resilient products, the customers in the Delicate category have the most fragile
products and the products of the customers in the Standard category fall between those two extremes.

Budget Information - Forthcoming Financial Year

The volume of work performed for each category of customer is measured in terms of cubic metres of
product handled. The budgeted volumes by customer category for the forthcoming financial year are as
follows:

	Robust	Standard	Delicate
Budgeted volume of products to be handled	90,000	135,000	75,000
(in cubic metres)

Budgeted packaging costs for the forthcoming financial year in respect of each of the customer categories
have been determined as follows: Robust: €990,000, Standard: €1,957,500 and Delicate: €1,875,000.

Other operational costs for the forthcoming period have been budgeted to be as follows:

Labour - basic hours	€1,050,000
Labour - overtime hours	€90,000
Occupancy	€1,500,000
Clerical and administration	€180,000

Activity Based Review

An activity based review of the company's operations has identified three key activities: Receipt and
Inspection, Warehousing and Packing. It has been determined that it would be reasonable to allocate
operational costs to these key activities in the following proportions:

	Receipt & Inspection	Warehousing	Packing
Labour - basic hours	20%	15%	65%
Labour - overtime hours	45%	20%	35%
Occupancy	25%	65%	10%
Clerical and administration	50%	5%	45%

The activity based review has also revealed that the degree of fragility of the products drives the amount
of time required for Receipt and Inspections, that the demands on Warehousing are driven by the average
floor space required per unit of product held for the customer category and that the time taken for Packing
reflects the complexity of customers' packaging specifications. The requirements per cubic metre of
product for each customer type have been assessed to be as follows:

	Robust	Standard	Delicate
Receipt and Inspection (minutes)	4	8	16
Floor space (square metres)	0.5	1	0.6
Packing (minutes)	20	40	60

• Requirement                                                                                                                     _

(a) Calculate the budgeted average cost per cubic metre of product stored and packaged for each of the

        three customer categories, without using the Activity Based information provided.                                     

(b) Using the Activity Based information provided, calculate the budgeted average cost per cubic metre of
product stored and packaged for each of the three customer categories. You may round your

        calculations to two decimal places.                                                                                                          

(c) Suggest how activity based costing may improve product costing and control within Packit Ltd.           

Answer 1

Packit Ltd. Fred Stores

(a) Budgeted average cost per cubic metre of product stored and packaged for each of the three customer categories, without using the Activity Based information

Particulars	Allocation Basis	Robust	Standard	Delicate	Total
Labour (Basic)	Budgeted volume of products	315,000	472,500	262,500	1,050,000
Labour (Overtime)	Budgeted volume of products	27,000	40,500	22,500	90,000
Occupancy	Budgeted volume of products	450,000	675,000	375,000	1,500,000
Clerical Admin	Budgeted volume of products	54,000	81,000	45,000	180,000
Packaging	Specific	990,000	1,957,500	1,875,000	4,822,500
TOTAL (a)	1,836,000	3,226,500	2,580,000	7,642,500
Budgeted volume of products (b)	90,000	135,000	75,000
Budgeted average cost per cubic metre of product stored and packaged (a)/(b)	20.40	23.90	34.40

(B) Budgeted average cost per cubic metre of product stored and packaged using the Activity Based information

(i) Allocation to cost center

Particulars	Receipt & Inspection	Warehousing	Packing
Labour (Basic)	210,000 (1,050,000*20%)	157,500 (1,050,000*15%)	6,82,500 (1,050,000*65%)
Labour (Overtime)	40,500 (90,000*45%)	18,000 (90,000*20%)	31,500 (90,000*35%)
Occupancy	375,000 (1,500,000*25%)	975,000 (1,500,000*65%)	150,000 (1,500,000*10%)
Clerical & Admin	90,000 (180,000*50%)	9,000 (180,000*5%)	81,000 (180,000*45%)
Total	715,500	1,159,500	945,000

(ii) Basis of allocation

Particulars	Robust	Standard	Delicate	Total
Receipt & Inspection (minutes)	360,000 (4*90,000)	1,080,000 (8*135,000)	1,200,000 (4*75,000)	2,640,000
Floor Space (square metres)	45,000 (0.5*90,0000	135,000 (1*135,000)	45,000 (0.5*45,000)	225,000
Packing (minutes)	1,800,000 (20*90,000)	5,400,000 (40*135,000)	4,500,000 (60*75,000)	11,700,000

(iii) Calculation of Budgeted Cost per cubic metre

Particulars	Robust	Standard	Delicate	Total
Receipt & Inspection	97,568.18 (715,500* 360,000/2,640,000)	292,704.54 (715,500* 1080,000/2,640,000)	325,227.27 (715,500* 1,200,000/2,640,000)	715,500
Warehousing	231,900 (1,159,500*45,000/225,000)	695,700 (1,159,500*135,000/225,000)	231,900 (1,159,500*45,000/225,000)	1,159,500
Packing Cost	145,384.62 (945000*1,800,000/11,700,000)	436,153.85 (945000*5,400,000/11,700,000)	363,461.54 (945000*4,500,000/11,700,000)	945,000
Packing Specific Cost	990,000	1,957,500	1,875,000	4,822,500
Total(a)	1,464,852.80	3,382,058.39	2,795,588.81	7,642,500
Budgeted volume of products (b)	90,000	135,000	75,000
Budgeted average cost per cubic metre of product stored and packaged (a)/(b)	16.28	25.05	37.27

(C) Activity based costing may improve product costing and control within Packit Ltd.

1. ABC helps in identifiying  actual cost incurred on products, which helps in product pricing and also in decisions regarding products continuation.

2. ABC helps in identifying cost centers, which can be helpful in controlling cost.

3. In this question earlier cost for Robust was 20.40 per cubic meter after ABC analysis the cost is ascertained at 16.28 per cubic meter. Thus robust prouct category is more profitable than the intial analysis.