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Published by: shaggy2k9 on May 08, 2010
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ACCAPaper F5Performance ManagementJune 2010Interim Assessment – Answers
To gain maximum benefit, do not refer to theseanswers until you have completed the interimassessment questions and submitted them for marking.
Page 2 of 14 KAPLAN PUBLISHING© Kaplan Financial Limited, 2009The text in this material and any others made available by any Kaplan Group company doesnot amount to advice on a particular matter and should not be taken as such. No relianceshould be placed on the content as the basis for any investment or other decision or inconnection with any advice given to third parties. Please consult your appropriateprofessional adviser as necessary. Kaplan Publishing Limited and all other Kaplan groupcompanies expressly disclaim all liability to any person in respect of any losses or otherclaims, whether direct, indirect, incidental, consequential or otherwise arising in relation tothe use of such materials.All rights reserved. No part of this examination may be reproduced or transmitted in anyform or by any means, electronic or mechanical, including photocopying, recording, or byany information storage and retrieval system, without prior permission from KaplanPublishing.
(a) Activity-based overhead absorption rates (OARs) are found by dividing theexpected cost in each cost pool by the number of cost driver transactionsexpected during the coming year.
Cost Pool Cost ($) Number of Drivers ABC OAR ($)
Production set-ups 105,000 300 set-ups 350.00 per set-upProduct testing 300,000 1,500 tests 200.00 per testComponentsupply/ storage25,000 500 componentorders50.00 per orderCustomer orders/delivery112,500 1,000 customerorders112.50 per order(b) Production of product ZT3 = (100
60) + (60
50) = 9,000 units per yearNumber of production runs = number of set-ups = 9,000/900 = 10 set-upsNumber of product tests = 10
4 = 40 testsNumber of component orders = number of production runs = 10 ordersNumber of customer orders = 100 + 60 = 160 ordersGeneral overheads absorption rate = 900,000/300,000 = $3.00 per direct labourhourAnnual direct labour hours for Product ZT3 = 9,000
10/60 = 1,500 hours
 Activity ABC OAR Number of Drivers Annual cost 
($)Setting up $350.00 per set-up 10 set-ups 3,500Product testing $200.00 per test 40 tests 8,000Component supply $50.00 per order 10 orders 500Customer supply $112.50 per order 160 orders 18,000 –––––––30,000General overheads = 1,500
$3.00 per hour = 4,500 –––––––Total annual overhead cost 34,500
Total unit cost $Components 1.00Direct labour = 7.80
10/60 = 1.30Overheads = 34,500/9,000 = 3.83 –––––6.13Profit mark up 2.45 –––––Selling price 8.58
(c) Traditional absorption costing allocates a proportion of fixed overheads(indirect costs) to product cost through an overhead absorption rate, usuallybased on labour hours, machine hours, or some other volume-related measureof activity. These overhead absorption rates may be factory-wide absorptionrates (blanket rates) or, for increased accuracy in determining product cost,departmental absorption rates.In the traditional manufacturing environment, indirect costs constituted arelatively small proportion of total product cost compared to direct costs suchas direct material cost, direct labour cost and direct expenses (collectivelyreferred to as prime cost).

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