1/28/2021 [Solved] QUESTION ONE Brick by Brick (BBB) is a building business that provides a range of building services to the

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QUESTION ONE
Brick by Brick (BBB) is a building business that provides a range of building services to the public. Recently
they have been asked to quote for garage conversions (GC) and extensions to properties (EX) and have
found that they are winning fewer GC contracts than expected. BBB has a policy to price all jobs at
budgeted total cost plus 50%. Overheads are currently absorbed on a labour hour basis. BBB thinks that a
switch to activity based costing (ABC) to absorb overheads would reduce the cost associated to GC and
hence make them more competitive.
Overheads                     Annual Costs             Activity Drivers                     Number of Activities
                                                          K
Supervisors                         90,000                        Site Visits                                                     500
Planners                                70,000                        plannining documents                         250
Property related      240,000            Labour hours                   40,000                               
Total                   400,000                                                        

A typical GC costs K3,500 in materials and takes 300 labour hours to complete. A GC requires only one
site visit by a supervisor and needs only one planning document to be raised. The typical EX costs K8,000
in materials and takes 500 hours to complete. An EX requires six site visits and five planning documents. In
all cases labour is paid K15 per hour.
Required
A.   Calculate the cost and quoted price of a GC and of an EX using labour hours to absorb the
overheads.                                                                                                                                                                    (8
Marks)
 
 
Brick by Brick
Costs and quoted prices for the GC and the Ex using ABC to absorb overheads;
 
 
GC
EX
 
$
$
Materials
3,500
8,000
Labour:
300hours x $15/hr
500hours x $15/hr
 
4,500
 
 
7,500
Overheads:(W2 & W3)
Supervisor
Planners
Property
 
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1,800
 
1,080
1,400
3,000
Total Cost
10,260
20,980
Quoted price
15,390
31,470
Working 2:                                  Number                     Cost per
                             Costs              of drivers                   driver
Supervisor            90,000.00       500                             180
Planners                70,000.00       250                             280
Property               240,000.00     40,000                        6
 
Working 3:
                             
                                   Supervisor                 Planner                      Property
Cost per driver (W2)  180                             280                             6
GC                             180 x1 = 180              280 x 1 = 280             300 x 6 = 1,800
EX                              180 x 6 = 1,080          280 x 5 = 1,400          500 x 6 = 3,000                      
 
B. Calculate the cost and the quoted price of a GC and of an EX using ABC to absorb the
overheads.                                                                                                                                                                 (17
Marks)
 
QUESTION TWO
Alta Production, Inc., reported the following production costs for the 12 months January through December.
Reporting Period
(Month)
Total Production
Costs
Level of Activity
(Units Produced)
 
K
 
January
460,000
300
February
300,000
220
March
480,000
330
April
550,000
390
May
570,000
410
June
310,000
240
July
440,000
290
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320
September
530,000
380
October
250,000
150
November
700,000
450
December
490,000
350
Required
A. Using this information, de ne the cost function using regression analysis.                 (17 Marks)
Y = a + bx
B. Assume Alta Production, Inc., will produce 400 units next month. Calculate total production costs for the
month.                                                                                                                                               (3 Marks)
C. Accepting that the coe cient of determination arising from the data given in the question is
approximately 0.86, interpret the signi cant of this fact.                                                               (5 Marks)

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Please refer to below provided explanation.

Step-by-step explanation

Question 1 :
PART 1 :

PART 2 :

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Question 2 :
PART 1 :
We can determine the cost function bu using regression analysis as follows :

Here,
n = 12
Σxy = 1,883,600,000
Σx = 3,830
Σy = 5,535,000
Σx2 = 1,303,500

The formula to determine variable costing is derived by using "b" as follows :

b = [(n * Σxy) - (Σx * Σy)] / [(n * Σx2 ) - (Σx)2]
b = [(12 * 1,883,600,000) - (3,830 * 5,535,000)] / [(12 * 1,303,500) - (3,830)2]
b = 1,404,150,000 / 973,100
b = 1,443 approx.

Therefore, variable cost per unit will be K1,443 approximately.

The formula to determine xed costing is derived by using "a" as follows :
a = {[Σy - (b * Σx)] / n}
a = {[5,535,000 - (1,443 * 3,830)] / 12}
a = K692.5

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Therefore, xed cost per unit will be K693 approximately.
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The cost function will be :

y = a + bx
y = K693 + K1,443x

PART 2 :
When the company produces 400 units, the total cost by using cost function will be :
Total cost = K693 + (K1,443 * 400 units)
= K577,893
Therefore, the total cost of producing 400 units will be K577,893 by the method of regression
analysis.

PART 3 :
Coe cient of determination means the total degree of change (or variability) one variable would
have due to the relation with another variable. Over here the coe cient of determination is 0.86
which means that the model used to determine the variability between the two factors (or variables)
is quite t for future projections and is a reliable forecast.

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