In: Accounting
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
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 |