Question

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 automotive controls department in thousands of Japanese yen): (Click the icon to view the 20x0 budget.) Requirement 1. Explain how Nakamura, Inc., allocates its indirect production costs using its traditional cost system The traditional cost system allocates indirect production costs based entirely on direct labor cost. Select the formula(s) and then calculate the indirect cost rate(s) under the traditional cost system. (Only use as mar decimal places, XX.) Indirect cost rate formula Indirect cost rate = 11

Answer 1

Requirement 1

The Traditional Cost System allocates Indirect Production Costs on the based entirely on Direct Labour Cost.

Indirect Cost Rate = Indirect Production Costs / Direct Labour Cost * 100

Indirect Production Costs = ¥ 21,766,000

Direct Labour Cost = ¥ 54,415,000

Indirect Cost Rate = 21,766,000 / 54,415,000 * 100

Indirect Cost Rate = 40%

Indirect Cost Allocation Rate is 40% of Direct Labour Cost

Requirement 2

Calculation of Activity Allocation Rate

	A	B	C= A/B
Particulars	Predicted Cost	Total Activity	Activity Allocation Rate
Receiving	3,500,000	50,000,000	7%	% of Direct Material Cost
Assembly	10,560,000	96,000	110	Per Control Unit
Quality Control	2,176,000	640	3,400	Per Control Hour
Shipping	5,530,000	7,900	700	Per Box Shipped
Total Indirect Costs	21,766,000

Requirement 3

Part A

Calculation using Traditional Costing

Particulars	Amount
Direct Materials	5,500,000
Direct Labour	1,500,000
Indirect Production Costs	600,000
Total Production Costs	7,000,000
Add : Markup (25% of Total Production Costs)	1,750,000
Price Charged	8,750,000

Indirect Costs = 40% of Direct Labour Costs

Indirect Costs = 40% of 15,00,000

Indirect Production Costs = ¥ 600,000

Part B

Calculation using Activity Based Costing

Particulars	Amount
Direct Materials	5,500,000
Direct Labour	1,500,000
Indirect Production Costs	1,229,000
Total Production Costs	8,229,000
Add : Markup (25% of Total Production Costs)	2,057,250
Price Charged	10,286,250

Notes

Calculation of Indirect Production Costs

Receiving Costs = 7% of Direct Materials Costs

Receiving Costs = 7% of 5,500,000

Receiving Costs =¥ 385,000

Assembly = 2,000 Control Units * ¥ 110 per Unit

Assembly = ¥ 220,000

Quality Control = 60 Control Hours * ¥ 3400 per Hour

Quality Control = ¥ 204,000

Shipping = 600 Boxes * ¥ 700 per Box

Shipping = ¥ 420,000

Indirect Production Costs = 385,000 + 220,000 + 204,000 + 420,000

Indirect Production Costs = ¥ 1,229,000

Requirement 4

There are differences in allocation of indirect costs using both the systems becuase of the reason that the traditional costing system allocates costs by using a single cost driver which is not appropriate as per current changing environment whereas Activity Based Costing allocates Indirect Costs on the basis of various activities and consumption of resources for those activities.

Activity Based Costing system is more accurate becuase an organisation use various activities which involves different level of resource consumption so it is never justifiable to allocate costs on the basis of single driver which has no relation to the consumption of resources.