Question

In: Accounting

ABC ltd is a circuit board producer and produces two products, L1 & L2. The company...

ABC ltd is a circuit board producer and produces two products, L1 & L2. The company currently uses traditional costing system for making business decisions. However, recently the company is considering a move towards the Activity-Based Costing (ABC) system. As one of the company’s accountant’s you have been asked to prepare a statement comparing both the costing methods for the next company board meeting. Your supervisor has given you the following quarterly data: -

Total Indirect Costs for the quarter:

Assembly RM630,000 Soldering RM270,000 Inspection RM160,000

L1 L2

Direct costs (materials, labour) RM162,400 RM178,240

Machine hours (assembly) 480 1,080

Number of units produced (soldering) 6,000 4,000

Testing hours (inspection) 6,000 8,000

In the traditional system, the Inspection department (support department) and its costs were shared by the Assembly and Soldering departments (production departments) i.e. 60% cost allocated to Assembly and 40% cost allocated to Soldering.

Under the traditional system, calculate the following: Manufacturing cost per unit for L1 and L2

L1 RM97.697; L2 RM203.614

L1 RM203.614; L2 RM97.697

L1 RM200,400; L2 RM133.600

None of the above

Expert Solution

Answer: L1 RM97.697 ; L2 RM203.614

Calculation:

1. Overhead cost

Particulars	Assembly	Soldering
Overhead cost	RM630,000	RM270,000
Inspection cost (RM160,000 * 60%) (RM160,000 * 40%)	RM96,000	RM64,000
Total Overhead cost	RM726,000	RM334,000

2. Predetermined overheads rate

Predetermined overhead rate = Total Overhead cost / Total Base quantity

Assembly

Overhead cost = RM726,000

Total Machine hours = 480 + 1,080 = 1,560

Assembly = RM726,000 / 1,560 machine hours = RM465.38 per machine hours

Soldering

Overhead cost = RM334,000

Total number of units = 6,000 + 4,000 = 10,000

Soldering = RM334,000 / 10,000 units = RM33.40 per unit

3. Allocation of overhead cost to product

L1 = (480 machine hours * RM465.38) + (6,000 Units * RM33.40) = RM423,782

L2 = (1,080 machine hours * RM465.38) + (4,000 Units * RM33.40) = RM636,210

4. Manufacturing cost per unit

Particulars	L1	L2
Direct cost (materials, labour)	RM162,400	RM178,240
Indirect cost (overhead cost)	RM423,782	RM636,210
Total manufacturing cost	RM586,182	RM814,450
/ Number of Units	6,000	4,000
Manufacturing cost per unit	RM97.697	RM203.614

All the best...

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