Accounting Exam: Budgeted Cost, ABC Costing, NPV, Ratios, Balanced Scorecard

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Question 1
(a) Calculation of budgeted cost per unit of each product
(i) Determination of the cost driver for each activity and absorption rate:
Cost pool/activity Cost driver
Overhead
s
Activity Absorption
rate
£ units £
Stores Cost No of Material Setup 140000 320 437.50
Production Cost No of Production
Setup
280000 280 1000
Quality Control Cost No of Quality
Inspection
180000 90 2000
(ii) Calculation of budgeted cost per unit for each product:
Micro Delta
Units
Price/cost
(£)
£
Units
Price/
cost (£) £
Direct material 6000
0
2.60 156000 25000 3.90 97500
Direct labour 6000
0
3.50 210000 25000 2.70 67500
Store costs 100 437.50 43750 220 437.50 96250
Production set up costs 80 1000 80000 200 1000 20000
0
Quality control inspection 30 2000 60000 60 2000 12000
0
549750 58125
0
Units produced 60000 60000
Cost per unit 9.1625 9.6875
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(b) Critical evaluation of ABC as a costing method:
Activity based costing can be explained as a process that includes calculation of overhead and
indirect costs for example utilities, salaries, with reference to products& services. The ABC
system is an underlying process that explains it as a procedure which includes cost accounting
based on certain activities, working that could be any task with determined objectives, plans,
goals (Bashir and et.al., 2018)
. There are certain benefits, risks associated and linked with ABC costing method.
Advantages of Activity based costing method:
1. It is considered helpful, serves as one of the best guides in formulating plans and
contributes in decision making process as well.
2. It is a more reliable and trustful product costing in comparison with other methods so
far discovered.
3. It helps in having full control over effective and efficient working of company.
4. It has proved to be more accurate in calculation of product and service costing.
5. Companies can evaluate relevant factors affecting decision making process in a
company.
6. It helps to ascertain costs which are adding more expenses in overheads and makes it
more expensive & costly. Managers could eliminate and reduce costs with formulating certain
strategies or business plans too.
Disadvantages of ABC as costing method:
1. Company, managers, employees find it impossible to calculate and allocate overhead,
production and service costs to certain activities.
2. Managers might find it difficult to explain the process of Activity based costing to its
stakeholder & shareholders in reference to costing (Djuhatmoko, Purwanto and Tjahjono,
2019).
3. The decision of activities & cost driver might result inappropriate and non-reliable.
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