Question

arse H Noriko Fujita is the controller of Nakamura, Inc., an electronic controls company located in Yokohama She recently attended a seminar on activity-based costing (ABC) in Tokyo. Nakamura's traditional cost accounting system has three cost categories: direct materials, direct labor, and indirect production costs. The company allocates indirect production costs on the basis of direct-labor cost. The following is the 20X0 budget for the gnme automotive controls department in thousands of Japanese yen): Click the icon to view the 20x0 budget) After Ms. Fujita attended the Automotive Controls Depart department and selected ac (Click the icon to view th In 20xo the Automotive Cont hours, and ship 7,900 boxes Read the requirements Ty Pla ults Requirement 1. Explain how Nakamura, Inc., allocates its indirect production costs using its traditional cost system. Include a computation of the The traditional cost system allocates indirect production costs based entirely on direct labor cost. son Select the formula(s) and then calculate the indirect cost rate(s) under the traditional cost system. (Only use as many lines as needed to show the decimal places, XX.) men Indirect cost rate formula Indirect cost rate 4 Indirect production costs med Direct labor cost 0.4 per direct labor yen cer Requirement 2. Explain how Nakamura, Inc., would allocate indirect production costs under Ms. Fujita's proposed ABC system. Include a comput auni The ABC system allocates indirect production costs separately for each activity Select the formula(s) and then calculate the Indirect cost rate(s) under the ABC system (Only use as many lines as needed to show the indirecte XX) Indirect cost rate formula Indirect cost rate Shipping costs yen per box shipped

Answer 1

1 The traditional cost system allocates indirect production Cost based entirely on Direct Labor Cost. Allocation Rate= Indirect Production Cost Direct Labor Cost Allocation Rate= 21766.00 54415.00 Allocation Rate= 0.40 Per Direct Labor Yen 2 The ABC system allocates indirect production costs separately for each activity. A E Activity Receiving Assembly Quality Control Shipping B Cost Allocation Base Direct Material Cost Number of Control Units QC Hours Number of Boxes Shipped C D Predicted Cost No. of Driver 3,500.00 50000 Direct Material Cost 10,560.00 9600 control Units 2,176.00 640 QC Hours 5,530.00 7900 Boxes F Indirect Cost Rate (D/F) 0.07 Per Direct Material Cost Yen 1.1 Per control Unit 3.4 Per QC Hours 0.7 Per Boxes Total 21,766.00 3 a. Calculation of Price charged if Nakamura uses Traditional Cost Accounting System Particulars Direct Material Direct Labor Indirect Production Cost Amount Calculation 5,500,000.00 Given 1,500,000.00 Given 2,200,000.00 (Direct Material 5500000 x 0.4) Total Cost 9,200,000.00 Profit Margin @25% 2,300,000.00 9200000 x 25% Total Sales Value 11,500,000.00 No. of control Units 2,000.00 Selling Price per Control Unit 5,750.00 a. Calculation of Price charged if Nakamura uses ABC Accounting System Amount Calculation 5,500,000.00 Given 1,500,000.00 Given Particulars Direct Material Direct Labor Indirect Production Cost Receiving Assembly Quality Control Shipping 385,000.00 (Direct Material 5500000 x 0.07) 2,200.00 (2000 control Units x 1.1) 204.00 (60 QC Hours x 3.4) 420 600 boxes x 0.7) Total Cost 7,387,824.00 Profit Margin @25% 1,846,956.00 7387824 x 25% Total Sales Value 9,234,780.00 No. of control Units 2,000.00 Selling Price per Control Unit 4,617.39 4 In traditional costing method, Indirect production cost is ascertained on the basis of the Direct Labor Cost. In the given question Allocation rate of Indirect Production cost is 0.4 per Labor Cost Yen. So, when labor cost increases, indirect cost of production will increase irrespective of different cost driver rates used by them. In ABC Costing Method, Indirect Production cost is allocated to product in the proportion of cost driver used by them. Thus, cost of production using ABC will be accurate compare to Traditional Method. Thus, ABC Accounting Methodi more accurate compare to Traditional Cost Method.