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Activity Based Costing

Activity Based Costing

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Published by: anon_672065362 on Nov 21, 2012
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03/12/2013

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5
Activity Based Costing
Question 1
Discuss the different stages in the Activity –based Costing.(Nov., 2003, 4 marks)
Answer
Different stages in activity –based costing
(i)Identify the different activities within the organization(ii)Relate the overheads cost to the identified activities(iii)Support activities are then spread across the primary activities(iv)Determine the activity cost drivers(v)Calculate the activity cost driver rates(vi)Compute the overhead cost to be charged over the productby using cost driver rates.
Question 2
Give three examples of Cost Drivers of following businessfunctions in the value chain:(i)Research and developmen(ii)Design of products, services and processes(iii)Marketing(iv)Distribution(v)Customer service(May, 2000, 5 marks)
Answer
A cost driver is any factor whose change causes a change in thetotal cost of a related cost object. In other words, a change in the
 
Cost Accounting
level of cost driver will cause a change in the level of the total costof a related cost object. The cost drivers for business functions viz. Research &Development; Design of products, services and processes;Marketing; Distribution and Customer service are as follows:
Business functionsCost Drivers
(i)Research & Development-Number of researchprojects
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Personnel hours on aproject
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 Technical complexities of the projects(ii)Design of products, services and processes-Number oproducts in design
-
Number of parts perproduct
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Number of engineeringhours(iii)Marketing-Number oadvertisement run
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Number of sales personnel
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Sales revenue
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Number of products andvolume of sales (inquantitative terms)(iv)Distribution-Number of itemsdistributed
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Number of customers
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Weight of itemsdistributed(v)Customer service-Number of service calls
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Number of productsserviced
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Hours spent in servicing of products
Question 3
5.2
 
Activity Based Costing
MNP suits is a ready-to-wear suit manufacturer. It has foucustomers: two wholesale-channel customers and two retail-channelcustomers.MNP suits has developed the following activity-based costingsystem: ActivityCost driverRate in 2004Order processingNumber of purchaseordersRs. 1,225 per order Sales visitsNumber of customevisitsRs. 7,150 per visit Delivery–regular Number of reguladeliveriesRs. 1,500 pedelivery Delivery-rushedNumber of rusheddeliveriesRs. 4,250 pedelivery List selling price per suit is Rs. 1000 and average cost per suit isRs. 550. The CEO of MNP suits wants to evaluate the profitability of each of the four customers in 2003 to explore opportunities for increasing profitability of his company in 2004. The following dataare available for 2003:ItemWholesalecustomersRetailcustomersWHRT Total number of orders4462212250Total number of sales visits8122220Regular deliveries4148166190Rush deliveries3144660 Average number of suits per order 4002003025 Average selling price per suitRs. 700Rs.800Rs.850Rs.900Required :(i)Calculate the customer-level operating income in 2003.(ii)What do you recommend to CEO of MNP suits to do toincrease the company’s operating income in 2004?(iii)Assume MNP suitsdistribution channel costs are Rs.17,50,000 for its wholesale customers and Rs. 10,50,000 for theretail customers. Also, assume that its corporate sustaining
5.3

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