Question

In: Accounting

Kota Mills supply Divine Denim with the organic denim used in their production. After discussions with...

Kota Mills supply Divine Denim with the organic denim used in their production. After discussions with Helen about the service she was getting from Good Numbers, the manager of Kota Mills decided to use Good Numbers to assist with their management decision making. Kota Mills produces three different weights of denim using two departments. In Department 1, machines weave the cloth. In Department 2 the cloth is dyed a variety of colours. Information for the combined use of resources in both departments for the three types of fabric is outlined below.

Bolts are 20 metres each. All fabric is inspected during production. Robotic equipment inspects the fabric for obvious flaws as the bolts are wound up. Each bolt spends about 5 minutes in the inspection process.




Denim

8 ounce13 ounce16 ounceTotalunitsMonthly production in units (bolts of fabric) 1,000 4,000 2,000 7,000boltsDirect material cost $ 8,000 24,000 20,000 52,000$Direct labour cost $ 660 1,320 920 2,900$Direct labour hours 33 66 46 145hoursMachine hours 500 1,333 1,500 3,333hoursNumber of set-ups for dye colour changes 10 30 20 60set-upsInspection time 83 333 167 583hours


Combined overhead costs for the two departments follow:

Cost to operate and maintain machines $ 40,000Set-up costs $ 11,000Inspection costs $ 6,996Total $ 57,996


Previously, Kota Mills used a costing system focused on processes. It allocated direct materials to each product separately but allocated direct labour and conversion costs as if they were incurred equally across the units produced. Under this costing system, the overhead cost for Department 1 is $19,332 and for Department 2 it is $38,664. Direct labour hours and costs in Department 1 are 55 hours at $1,100, and the remaining are in Department 2. Direct materials for Department 1 are $15,000 for 16 ounce denim, $16,000 for 13 ounce denim, and $6,000 for 8 ounce denim. The remaining direct materials are added in Department 2. No beginning or ending inventory or abnormal spoilage is recorded for Kota Mills this period.

Required:

Set up a spreadsheet to perform the calculations in ii. and iii. below. Use a data input section and cell referencing.


Use conventional process costing to allocate the direct materials and conversion costs per department to total bolts produced. Develop a cost per bolt for each type of fabric. (Hint: You will need to first calculate the equivalent cost per bolt for conversion costs for each department.)


Using activity-based costing (ABC), develop a cost per bolt.


Compare the process costing and ABC results. Identify the products with overstated costs and those with understated costs. Explain why the costs are misstated under traditional process costing.


How could the Kota Mills manager use the ABC information to improve operations? (max 200 words) (3 marks


Solutions

Expert Solution

Statement of Level of Activity
Particulars 8 ounce 13 ounce 16 ounce Total
Labour Hours 33 66 46 145
Machine Hours 500 1333 1500 3333
No. of Set Ups 10 30 20 60
Inspection Time 83 333 167 583
Statement of Cost Pools
Cost Drivers / Activity Total Costs (A) Allocation Base Level of Allocation Base (B) Activity Rates (C=A/B)
Cost to operate & maintaining machine 40000 Machine Hours 3333 12.00
Set up Costs 11000 No.of Set Ups 60 183.33
Inspection Costs 6996 Inspection time 583 12.00
Particulars Activity Incurred Overhead Assigned
8 ounce 13 ounce 16 ounce 8 ounce 13 ounce 16 ounce
Cost to Operate & Maintaining Machine 500 1333 1500 0 0 0
Set Up Costs 10 30 20 0 0 0
Inspection Costs 83 333 167 0 0 0
0 0 0
Note: Overhead Assigned = Activity Rates * respective activity incurred
Statement of Product Costing (As per ABC Analysis)
Particulars 8 ounce 13 ounce 16 ounce Total
Material 8000 24000 20000 52000
Direct labor 660 1320 920 2900
Overheads 8829 25492 23671 57992
Total Cost (A) 17489 50812 44591 112892
Volume (B) 1000 4000 2000 7000
Cost Per Bolt (A/B) 17.49 12.70 22.30 16.13
Statement of Costs as per Traditional Methos
Particulars Department 1 Department 2 Total
Overhead Cost 19332 38664 57996
Direct Labor Cost 1100 1800 2900
Direct Material
16 ounce 15000 5000 20000
13 ounce 16000 8000 24000
8 ounce 6000 2000 8000
Total 57432 55464 112896
Direct Labour Hours 55 90 145
ABC Information to improve Operations
Bolts with higher contributions to be produced

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