Self-test: Activity-based costing | ACCA Qualification | Students | ACCA

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SELF-TEST: ACTIVITY-BASED COSTING

by Student Accountant 06 Sep 2010 View the table It is very important that the company exercises good quality control on all its output. Accordingly, extensive quality testing is carried out on each batch of pharmaceuticals produced. Pharmaceutical B is very specialist, uses more expensive, perishable ingredients, and has a short shelf life. It is therefore made in small batches of 1,000 units per batch. Pharmaceutical A is much more widely used and is very stable. It is made in batches of 10,000 units. Both products are made using the same production facilities. For quality purposes the entire production facility has to be stopped and sterilised between each batch, but each occurrence of this process is twice as expensive for each batch of Pharmaceutical B as for Pharmaceutical A. Over the course of a year, it is estimated that buying, storing and generally handling the ingredients for Pharmaceutical B costs twice as much as it does for Pharmaceutical A ingredients. A breakdown of the total fixed costs shows them to made up of the following: Quality control costs: $4,500,000 Production line sterilisation costs: $3,000,000 Material ordering, storage and handling costs: $1,215,000 Other fixed costs: $1,785,000 Total: $10,500,000

Required
The company has decided to investigate an ABC approach. (a) Determine the cost drivers of quality control costs, sterilisation costs, and material handling costs (ie which events cause those costs to be incurred). (b) For quality control costs, calculate the cost per testing event and then the cost per unit of each of the two Pharmaceuticals. (c) For production line sterilisation costs, calculate the cost of sterilising for each batch of Pharmaceutical A, and for each batch of Pharmaceutical B, hence the costs per unit for each. (d) Calculate the material handling costs per unit of Pharmaceutical A and per unit of Pharmaceutical B. (e) Work out the overhead absorption rate per hour for other costs of each pharmaceutical. (f) Work out the total absorption cost per unit for each pharmaceutical, using the ABC approach. (g) Comment on your results. View solution

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12/9/2010 8:02 PM