Question

A. Rio Group LLC manufactures two types of widgets: Widget A and Widget B. The

company has been allocating its overhead to each product using traditional costing and direct

labor hours as the cost driver. Using the same expenses and information, Rio Group LLC has

asked you to allocate its overhead to each product using activity-based costing. What are the

necessary steps you will take to implement the Activity-based costing system in his

company?

B. Reliance Chemicals Inc had targeted revenue of $ 95000 from their chemical segment for

the year ended 2018. But at the end of the year, they achieved revenue of $ 93000. There is a

decrease of $2000 in their revenue. The fluid division have not achieved the targeted revenue

due to which their chemical division target falls short by $2000 for which Manager of a

Revenue center will be responsible. You have been appointed a cost accounting expert. What

are the necessary steps you will take to implement the responsibility accounting system

in chemical company? (10 Marks

C) Casing (X) manufactures Iphone cases for associated enterprises. There are many

companies around that manufacture Iphone cases, including independent enterprise

Accessories (B). B and X manufacture similar Iphone cases. Now say that X is asked by

associated enterprise Y to manufacture 10,000 Iphone cases. The Fixed cost is Rs. 100 perpiece and the variable cost Rs. 100 per piece also. The mark up is 25 % on cost price. The

company wants to use Cost plus markup method of transfer pricing. A. What is the transfer

price per case. B. What is the total profit earned by X. C. What will be transfer price if the

markup increased to 30%.

Answer 1

A. As, earlier overheads are allocated undero traditional based costing system on the basis of labour hours, there is need to allocate overhead cost under ABC costing by:

First select the cost driver on the basis of which overhead expenses are allocated on the basis of overhead expenses.

Check how much cost object is incurred in widget A and widget B, Cost object is term described in accounting to which cost are assigned.

Allocate overhead expenses on the basis of cost object which is incurred in Widget A and widget B.

B. As Cost accounting expert, we will implement responsible accounting system in the chemical industry.

As reveue of $ 2000 is less acheived , Reasons for low revenue will be identified, then that manager of functional head will be responsible like:

i) if cost increased, due to which less products sold, then costing manager will be responsible.

ii) revenue manager will be responsible, if product sold at less price or less quqntities are sold.

iii) if units are produced less, due to which it is sold less,than production manager will be responsible., likewise purchase manager too responsible, if raw material purchased costly or less quantity purchased by him.

C. a) Transfer price per case is Cost plus Mark up, Mark up = 25%

Fixed cost is 100 per piece, variable cost is also 100 per pece, ttal cost is 200 per piece.

Transfer price is : 200 + 200*25%

= Rs. 250

b) If mark up increased to 30%

Transfer price is: 200 + 200*30%= Rs. 260.