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This is BBM206/05 Business Accounting II subject
Loci Sdn Bhd manufactures three products, X, Y and Z. Demand for products X and Y is relatively elastic whilst demand for product Z is relatively inelastic. Each product uses the same materials and the same type of direct labour but in different quantities. For many years, the company has been using full absorption costing and absorbing overheads on the basis of direct labour hours. Selling prices are then determined using cost plus pricing. This is common within this industry, with most competitors applying a standard mark-up. Budgeted production and sales volumes for X, Y and Z for the next year are 40,000 units, 32,000 units and 44,000 units respectively.
The budgeted direct costs of the three products are shown below:
Product RM per unit RM per unit RM per unit 25 30 Direct materials Direct labour (RM15 per hour) 28 45 22.50
In the next year, Loci Sdn Bhd also expects to incur indirect production costs of RM2,129,600, which are analysed as follows:
RM 380,000 378,000 Cost drivers Number of batches Number of purchase orders Cost pools Machine set up costs Material ordering costs Machine running costs General facility costs 890,000 481,600 Number of machine hours Number of machine hours 2,129,600
The following additional data relate to each product:
800 Product Batch size (units) No of purchase orders per batch Machine hours per unit 800 10
Loci Sdn Bhd wants to boost sales revenue in order to increase profits but its capacity to do this is limited because of its use of cost plus pricing and the application of the standard mark-up. The finance director has suggested using activity based costing (ABC) instead of full absorption costing, since this will alter the cost of the products and may therefore enable a different price to be charged.
You are the accountant of Loci Sdn Bhd. In an annual meeting, you are required by the finance director to take the following actions.
a. Explain what is full absorption costing to the board of directors. [3 marks]
b. Explain what is activity based costing- [3 marks]
c. Explain the steps involved in applying activity-based costing. [4 marks]
d. Calculate the budgeted full production cost per unit of each product using Loci Sdn Bhd's current method of absorption costing. All workings should be to two decimal places. [3 marks]
e. Calculate the budgeted full production cost per unit of each product using activity based costing. All workings should be to two decimal places. [12 marks]
f. Discuss the impact on the selling prices and the sales volumes OF EACH PRODUCT which a change to activity based costing would be expected to bring about. [5 marks]
(a) Full absorption cost: Absorption costing is one of approach which is used for the purpose of valuation of inventory or calculation of cost of the product in the company where all the expenses incurred by the company are taken into consideration i.e., it includes all the direct and indirect expenses incurred by the company during the specific period.
(b) Activity Based Costing: Activity Based Costing is an accounting methodology that assign costs to activities rather than products or services. This enables resources & overhead costs to be more accurately assigned to products & services that consumes them.
(c) Steps involved in applying Activity Based Costing:
(d) Please refer below image
This is BBM206/05 Business AccountingII subjectQuestion 3 Loci Sdn Bhd manufactures three products, X,...
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