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QUESTION NO 1 Company XYZ has 2 fixed price contracts for 2 different clients. The company has enough capacity for both contracts but is uncertain whether they will be profitable. Data as follows: Customer Component Type Contract Value($) Contract Quantity Material cost/unit Moulding time/batch Batch Size Annual Budgeted overheads as follows: Activity Moulding Inspection Cost Driver Moulding hours Batches Cost driver volume/yr 2,000 150 20 Cost pool $150,000 $75,000 $125,000 AAA A999 $27,000 1,000 unit $15 5 hours 100 units BBB B999 $100,000 2,000 units $20 7.5 hours 50 units

Production Contracts Management Required:

(a) Calculate the activity based costs and profits for each contract (b) Calculate the profit for each job using Absorption costing. Absorb overheads using moulding hours.

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000 $96. costing/managerial accounting and financial management.800 8.000 units Cost driver Cost volume/yr pool 1.000 $70.000 Purchase orders Output Production batch size 100 units Materials movements 6 per batch Machine hours per unit Required: (a) Calculate the budgeted overhead costs using activity based costing principles (b) Calculate the budgeted overhead costs using absorption costing (absorb overhead using machine hours) (c) How can the company reduce the ABC for Product XX 0.basiccollegeaccounting. pl visit http://www.000 $112.000 2. The company’s most popular product is Product XX The following are Product XX’s data for next year budget: Activity Purchasing Setting Materials handling Inspection Machining costs Cost Driver Purchase orders Batches produced Materials movements Batches produced Machine hours 25 15.basiccollegeaccounting.1 (Page 2) [If you need more questions and answers E-books on subjects like bookkeeping.com/) “Dedicated to helping Students & Teachers” Managerial Accounting Test Paper Questions (WITH ANSWERS) On ACTIVITY-BASED COSTING (ABC) E-BOOK _________________________________________________________________________ QUESTION NO.000 2.500 $75. financial accounting. 2 Company XYZ has 6 standard products from stainless steel and brass.com ] .LEARNING FREE ONLINE ACCOUNTING (http://www.800 50.000 $150.

Give an example for each activity listed in the above table. costing/managerial accounting and financial management.LEARNING FREE ONLINE ACCOUNTING (http://www.000 40 10 15 25 Maintenance 6.com ] . financial accounting. please fill up the following values (i) Overhead per cost driver unit (ii) Total Overhead per product per activity (iii) Cost per item Total Overhead Total Cost driver units Total overhead per Cost Activity per cost Overheads driver per product product per activity driver unit units $ Units X Y Z X Y Z Machinery set-ups 20. pl visit http://www.100 450 450 $ Cost per item Question 1(b): What is a cost driver unit.000 230 140 80 100 Materials handling 12.000 120 75 55 70 Supervision 6. $ $ (Page 3) [If you need more questions and answers E-books on subjects like bookkeeping.basiccollegeaccounting.3 1(a) Refer to below table. what do you understand by the term “cost driver unit”.000 90 12 14 14 Quality Control 24.450 25 4 6 5 Number of units produced 1.basiccollegeaccounting.com/) “Dedicated to helping Students & Teachers” Managerial Accounting Test Paper Questions (WITH ANSWERS) On ACTIVITY-BASED COSTING (ABC) E-BOOK _________________________________________________________________________ QUESTION NO.

00 50.000 Y 10.4 A company manufactures two products. costing/managerial accounting and financial management.000 Question: Using activity-based costing.000 $20 ½ 4 70 160 $ 300.000 70.basiccollegeaccounting. what is the full production cost per unit X? (Page 4) [If you need more questions and answers E-books on subjects like bookkeeping. pl visit http://www.com ] .LEARNING FREE ONLINE ACCOUNTING (http://www. using the same equipment and similar processes. X and Y. Data for the production of these items in one period is shown below: Data: Quantity produced per period Material cost per unit Direct labor hours per unit Machine hours per unit Set-ups per period Orders handled per period Cost per direct labor hour Overhead costs Relating to machine activity Relating to set-ups of production runs Relating to handling of orders X 20. financial accounting.basiccollegeaccounting.com/) “Dedicated to helping Students & Teachers” Managerial Accounting Test Paper Questions (WITH ANSWERS) On ACTIVITY-BASED COSTING (ABC) E-BOOK _________________________________________________________________________ QUESTION NO.

com/) “Dedicated to helping Students & Teachers” Managerial Accounting Test Paper Questions (WITH ANSWERS) On ACTIVITY-BASED COSTING (ABC) E-BOOK _________________________________________________________________________ ANSWERS SECTION Answer to Question No. financial accounting.000 Cost driver volume/yr (b) 2.5=300 1 Step 3: Finally. costing/managerial accounting and financial management.000 $75. Step 1: Compute cost per unit of cost driver = Cost pool / cost driver volume Activity Cost pool (a) $150. pl visit http://www.000 150 20 Cost/unit of cost driver (a)/(b) $75/moulding hour $500/batch $6.1 (a) Computation of the activity based costs and profits for each contract.000 $125.250/contract Moulding Inspection Production Management Step 2: Compute the cost drivers consumed by each contract Cost driver Batches Moulding hours Contracts Customer AAA 1.com ] .000unts/50=40 40batchesx7.basiccollegeaccounting. compute the Costs And Profit For Each Contract (Page 5) [If you need more questions and answers E-books on subjects like bookkeeping.basiccollegeaccounting.LEARNING FREE ONLINE ACCOUNTING (http://www.000 unit/100 =10 10batches x 5=50 1 Customer BBB 2.

250 $88.000 ($3.LEARNING FREE ONLINE ACCOUNTING (http://www.000 Inspection Management Total cost Profit/(Loss) $20.basiccollegeaccounting.000 2.com/) “Dedicated to helping Students & Teachers” Managerial Accounting Test Paper Questions (WITH ANSWERS) On ACTIVITY-BASED COSTING (ABC) E-BOOK _________________________________________________________________________ Under Activity Based Costing Methodology Costs And Profits For Each Contract Contract AAA Selling price Materials Moulding 1.000+$125.250 $30.500 $5. (Page 6) [If you need more questions and answers E-books on subjects like bookkeeping.000 =$175 per moulding hour. costing/managerial accounting and financial management.250 $6.750 300 hour x$75 40 batches x $500 Contract BBB $100.basiccollegeaccounting.com ] .000 $40. financial accounting.000 x $15 50 hours x $75 10 batches x $500 $27.000) (b) Computation of profit based on absorption costing using moulding hour First compute the overhead absorption rate =Total annual overheads/annual moulding hour =($150.000 x $20 $3.000 $6.000)/2.000 $15.750 $11.000 $22. pl visit http://www.

500 $7.000 $40. the management will think that both contracts were profitable.000 $52. costing/managerial accounting and financial management. Customer AAA’s contract would be unprofitable while Customer BBB’s contract is worth accepting.000 $8. (Refer earlier article on ABC able to give a true cost) 2.500 $23.000 x $15 50 hours x $175 $27.750 $3. 1. Based on activity based costing.1 (continued) Under Absorption Costing Methodology Costs And Profits For Each Contract Contract AAA Selling price Materials Overheads Total cost Profit/(Loss) Notes: 1.500 $92.250 (Page 7) [If you need more questions and answers E-books on subjects like bookkeeping.LEARNING FREE ONLINE ACCOUNTING (http://www. If we use the traditional costing accounting/method which is the absorption costing basis. pl visit http://www.com ] . 3.basiccollegeaccounting.basiccollegeaccounting.000 $15. financial accounting. Using activity based costing. the management should only accept only 1 contract which is Customer AAA’s contract.com/) “Dedicated to helping Students & Teachers” Managerial Accounting Test Paper Questions (WITH ANSWERS) On ACTIVITY-BASED COSTING (ABC) E-BOOK _________________________________________________________________________ ANSWERS SECTION Answer to Question No.000 x $20 300 hour x$175 Contract BBB $100.750 2.

basiccollegeaccounting.000 units x 0. pl visit http://www.000 $50/purchase order $40/batch $12/movement $25/batch $3/machine hour Purchasing Setting Materials handling Inspection Machining Step 2: Compute the volume of cost drivers consumed by Product XX Purchase orders (given) =25 Batches=15.LEARNING FREE ONLINE ACCOUNTING (http://www.250 (Page 8) [If you need more questions and answers E-books on subjects like bookkeeping. financial accounting.com/) “Dedicated to helping Students & Teachers” Managerial Accounting Test Paper Questions (WITH ANSWERS) On ACTIVITY-BASED COSTING (ABC) E-BOOK _________________________________________________________________________ ANSWER TO QUESTION NO.000/100=150 Materials movement=150 batches x6=900 Machine hours=15.1=1.800 8.000 2.000 96.basiccollegeaccounting.000 $112.com ] . costing/managerial accounting and financial management.000 $150.2 (a) Computation of the activity based overheads Step 1: Compute cost per unit of cost driver = Cost pool / cost driver volume Activity Cost pool Cost driver Cost/unit of (a) volume/yr cost driver (b) (a)/(b) $75.800 50.000 $70.500 2.500 Step 3: Compute the Activity Based Overheads cost for Product XX Activity Purchasing 25 orders x $50 $1.000 1.

financial accounting.500 Total $26.06 Budgeted machining hours for Product XX=1.500 Budgeted absorbed overhead =1. costing/managerial accounting and financial management.basiccollegeaccounting.000 Material 900 movements x $12 $10.basiccollegeaccounting.000) =$503. materials handling and inspection costs.500 hours x $3 $4.000/50.000+$150.000 Budgeted absorption cost/machine hour =$503.500 x $10.800 handling Inspection 150 batches x $25 $3.000+$112.000+$96.750 Machining 1.000+$70.com ] .com/) “Dedicated to helping Students & Teachers” Managerial Accounting Test Paper Questions (WITH ANSWERS) On ACTIVITY-BASED COSTING (ABC) E-BOOK _________________________________________________________________________ Setting 150 batches x $40 $6.090 © Ways in which the company can reduce the ABC for product XX: • • Reduce the number of batches by increasing the batch size which will then reduce the setting overhead. Reduce the number of purchase orders (Page 9) [If you need more questions and answers E-books on subjects like bookkeeping.LEARNING FREE ONLINE ACCOUNTING (http://www.06 =$15.300 (b) Computation of budgeted overheads costs for Product XX using absorption costing Budgeted overheads =($75. pl visit http://www.000 =$10.

867 8. financial accounting.com ] .basiccollegeaccounting.750 1.306 1.500 1.000 6.78 A cost driver is “an activity which generates cost”.000 6.000 2. costing/managerial accounting and financial management.basiccollegeaccounting.100 $ 28.957 1. The cost driver unit.000 24.46 6.LEARNING FREE ONLINE ACCOUNTING (http://www.00 150.000 12. depending upon the cost driver in question Examples for each of the activities in the table are as follows: Activity Machinery set-ups Possible cost driver unit Number of set-ups (Page 10) [If you need more questions and answers E-books on subjects like bookkeeping.450 230 90 120 40 25 86.3 Part 1(a) is a simple illustration to identify all of the steps necessary to do the numerical part of an ABC question.602 450 450 $ 52. one delivery and so forth.548 1.290 23.33 200.com/) “Dedicated to helping Students & Teachers” Managerial Accounting Test Paper Questions (WITH ANSWERS) On ACTIVITY-BASED COSTING (ABC) E-BOOK _________________________________________________________________________ • Innovate ways of speeding up production so that the machining hours are reduced. or number of deliveries. therefore is one inspection.696 1.000 1.174 1.250 3.621 29.000 14. Total Total (i) Cost Overhead Overhead per cost driver s driver unit units $ Units 20. ANSWER TO QUESTION NO.032 31.600 15. such as number of quality inspections.96 133.00 Cost driver units per product X 140 12 75 10 4 Y Z (ii) Total overhead per product per activity X Y Z 12.49 $ 65. pl visit http://www. Hours or weight may be cost driver units.867 Activity Machinery set-ups Materials handling Quality control Supervision Maintenance 80 100 14 55 15 6 14 70 25 5 Number of units produced (iii) Cost per item Answer 1(b) 11.00 258.

basiccollegeaccounting.000 m/c hr b Set-up driven costs 50.000 Set-ups(30 x$500) 15.75 500 per set up 350 per order (Page 11) [If you need more questions and answers E-books on subjects like bookkeeping.000 $8.95 $ 3.000/200 orders Overhead costs of X $ Machine driven costs(40.000 Units produced Overhead cost per unit Full cost per unit ($5+$4+$8.95) 20.000x$3.000 Orders handled(40x$350) 14.000/80.000/100 set ups c Order driven costs 70. costing/managerial accounting and financial management.com/) “Dedicated to helping Students & Teachers” Managerial Accounting Test Paper Questions (WITH ANSWERS) On ACTIVITY-BASED COSTING (ABC) E-BOOK _________________________________________________________________________ Material handling Quality control Supervision Maintenance Kilograms of material handled Inspection hour Number of work teams Maintenance staff hours ANSWER TO QUESTION NO.95 $17. pl visit http://www.000 179. financial accounting.com ] .75) 150.4 $ a Machine hour driven costs 300.basiccollegeaccounting.LEARNING FREE ONLINE ACCOUNTING (http://www.

com/) “Dedicated to helping Students & Teachers” Managerial Accounting Test Paper Questions (WITH ANSWERS) On ACTIVITY-BASED COSTING (ABC) E-BOOK _________________________________________________________________________ (Page 12) [If you need more questions and answers E-books on subjects like bookkeeping.basiccollegeaccounting. financial accounting.basiccollegeaccounting.com ] . costing/managerial accounting and financial management. pl visit http://www.LEARNING FREE ONLINE ACCOUNTING (http://www.

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