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ACC200 Activity Based-Costing Method vs Traditional Costing

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ACC200 introduction to management accounting assignment (ACC200)

   

Added on  2020-05-28

ACC200 Activity Based-Costing Method vs Traditional Costing

   

ACC200 introduction to management accounting assignment (ACC200)

   Added on 2020-05-28

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Solution-1Calculation of cost per unit under the current traditional costing systemThe Sewing Easy Ltd allocates the indirect cost using traditional method basis on machine hours.For this, firstly the predetermined overhead rate needs to be computed for allocation of indirectcosts to the product. The formula for calculating the predetermined overhead rate is as below:Predetermined Overhead Rate = Total Indirect Overhead/ Total Machine hoursHence, the predetermined overhead rate of the company is $31.25 (250,000/ 8000).Now, the next step is to allocate the indirect overheads to products using above calculatedpredetermined overhead rate.ParticularsBasicAdvanceTotal machine hours4,6003,400Units produced and sold1,6001,500Machine hour per unit (total machine hours/ unit produced and sold)2.882.27Overhead per unit89.8470.83Hence, the cost per unit of the models is as below:Particulars Basic Advance Direct material cost325.00560.00Direct Labor cost150.00260.00Allocated indirect overheads89.8470.83Other costs* (201,700/1,500)134.47Total cost per unit564.841,025.30*Other costs includes the following costs directly attributable to Advance Model.Selling & Admin expense140,600Interest expense25,200Office rent35,900Total expense201,700Hence, the cost per unit for Basic Model is $564.84 and for Advance Model is $1,025.30.
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Solution-2Calculation of cost per unit under the current activity based costing systemABC or activity based costing system is the system for allocation of costs to the product on thebasis of activities or resources consumed by the respective product. It is a more practical methodand generally provides the accurate results. For allocation of costs under this system, first of all,the cost drivers are identified and then the costs are allocated on the basis of cost driversconsumed by respective products. The calculation of allocation of indirect costs to product as per ABC is as below:ParticularsIndirectOverheads Activities Consumed Cost allocationBasic ModelAdvanceModelTotalCost DriverCost per activityBasic ModelAdvance ModelInspection20,000200750950Inspections21.054,21115,789Assembly90,0004,6003,4008,000machinehours11.2551,75038,250Production scheduling105,00050500550Runs190.919,54595,455Machine set-up35,000100250350set up100.0010,00025,000Total Costs250,00075,506174,494No. of units1,6001,500Cost per unit47.19116.33Hence, the cost per unit of both the products is as below:Particulars Basic Advance Direct material cost325.00560.00Direct Labor cost150.00260.00Allocated indirect overheads47.19116.33Other costs* (201,700/1,500)134.47Total cost per unit522.191,070.80Hence, the cost per unit for Basic Model is $522.19 and for Advance Model is $1,070.80.
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Solution-3 (a)December 2017 Profit and Loss Statement for the advance model using traditional costingParticulars Units Per unit Amount ($)Sales *1,5001,2301,845,000ExpensesDirect material cost1,500560840,000Direct Labor cost1,500260390,000Overhead cost1,50070.83106,245Other expenses-Selling & Admin expense140,600-Interest expense25,200-Office rent35,900Net Profit307,055* The selling price per unit is 20% plus cost. Hence, the selling price per unit is $1,230(1025.30*120%).Solution-3 (b)December 2017 Profit and Loss Statement for the advance model using ABCParticulars Units Per unit Amount ($)Sales *1,5001,2851,927,433ExpensesDirect material cost1,500560840,000Direct Labor cost1,500260390,000Overhead cost1,500116.33174,494Other expenses-Selling & Admin expense140,600-Interest expense25,200-Office rent35,900Net Profit321,239* The selling price per unit is 20% plus cost. Hence, the selling price per unit is $1,285(1070.80*120%).
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