Question

Question 2 Grafton Ltd produces three products: X, Y and Z. The company has been using a single direct labour cost percentage to allocate overhead costs to products. Recently, managers of Grafton have noticed that, due to increasing overbeads and loss of market share, the current costing system is in need of replacement. A specific team has been charged with the responsibility of developing a new system of costing based on activities. Production information is as follows: Production volume Selling price per unit Material cost per unit Labour cost per unit 7,500 units £47 £18 12,500 units £80 4,000 units £68.00 £16.00 £6.40 £25 Total overheads for all three products are: Materials receiving and handling Machine maintenance and depreciation Set-up costs Engineering costs Packaging Total £150,000 £390,000 £18,688 £100,000 £60,000 €718,688 The following information is also provided about the activities involved in the production: 0.5 05 No. of materials movements Machine hours per unit No. of set-ups Proportion of engineering work No. of orders packaged 30% 20% 50% 22 Requirement (a) Calculate the overhead rates and product unit costs for X Y and Z under the existing costing system 3 Marks (b) Using the information provided, decide on the most appropriate cost drivers and allocate the overhead costs accordingly. Calculate product costs for the three products using activity based costing methods to allocate overheads. 12 Marks (c) Critically evaluate activity based costing approaches for allocating overheads. 10 Marks Total 25 Marks

The requirement is included there but nonetheless, here they are below. Thank ms

Requirement
(a) Calculate the overhead rates and product unit costs for X, Y and Z under the existing costing system.                                                                          
3 Marks
(b) Using the information provided, decide on the most appropriate cost drivers and allocate the overhead costs accordingly. Calculate product costs for the three products using activity based costing methods to allocate overheads.  
12 Marks
(c) Critically evaluate activity based costing approaches for allocating overheads.

Answer 1

Existing Cost sheets
Particulars	X	Y	Z	Total
Production QTY	7,500	12,500	4,000
Sales Value (Rs.)	3,52,500	10,00,000	2,72,000	16,24,500
Costs
Material	-1,35,000	-3,12,500	-64,000	-5,11,500
Labour	-30,000	-1,00,000	-25,600	-1,55,600
Overheads (in ratio of labour cost)	-1,38,565	-4,61,882	-1,18,242	-7,18,688
Total Costs	-3,03,565	-8,74,382	-2,07,842	-13,85,788
Profits	48,935	1,25,618	64,158	2,38,712
Ohds rates - existing	18.48	36.95	29.56
Revised Cost Sheets
Particulars	X	Y	Z	Total
Production QTY	7,500	12,500	4,000
Sales Value (Rs.)	3,52,500	10,00,000	2,72,000	16,24,500
Costs
Material	-1,35,000	-3,12,500	-64,000	-5,11,500
Labour	-30,000	-1,00,000	-25,600	-1,55,600
Overheads (Note 1 below)	-1,76,180	-3,13,003	-2,29,506	-7,18,688
Total Costs	-3,41,180	-7,25,503	-3,19,106	-13,85,788
Profits	11,320	2,74,497	-47,106	2,38,712
Note 1 - Allocation of ohds
Particulars	X	Y	Z	Total	Basis of allocation
Mat rec and Handling cost	7,595	47,468	94,937	1,50,000	No. of Material Movement
Mach Main and Depr	1,35,417	2,25,694	28,889	3,90,000	Machine hours
Set up	1,168	5,840	11,680	18,688	No. of setups
Engineering Cost	30,000	20,000	50,000	1,00,000	Eng %
Packaging	2,000	14,000	44,000	60,000	No. of packages
	1,76,180	3,13,003	2,29,506
Ohd rates new	23.49	25.04	57.38
Ohd rates old	18.48	36.95	29.56
Evaluation
Activity based costing give true pictures of performace of various products and their costs.
It helps in making correct decisions based on correct information.
Under existing costing, all the products are profitable, hence the company is doing good.
However, as per ABC, product Z is in loss and cost cutting measures are required for sustainability.