Financial Reporting for Management: Budgeting, ABC Costing, NPV and Performance Evaluation

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FINANCIAL REPORTING FOR
MANAGEMENT
MODULE NO: BMP6015
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ANSWER BOOKLET
All the pages of the answer booklet should be submitted including blank ones Please
type your answers in the spaces provided
Insert additional pages where required

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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
Overheads Activity Absorption rate
£ units £
Stores cost Material requisitions 140000 320 140000 / 320
= 437.5
Production set up cost Production set ups 280000 280 280000 / 280
= 1000
Quality control inspection Quality control inspections 180000 90 180000 / 90
= 2000
(ii) Calculation of budgeted cost per unit for each product:
Micro Delta
Units
Price/
cost (£)
£
Units
Price/
cost
(£)
£
Direct material 60000 2.60 156000 25000 3.90 97500
Direct labor 60000 3.5 210000 25000 2.70 67500
Store costs 100 437.5 43750 220 437.5 96250
Production set up costs 80 1000 80000 200 1000 200000
Quality control
inspection
30 2000 60000 60 2000 120000
549750 581250
Units produced 60000 25000
Cost per unit 9.16 23.25

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(b) Critical evaluation of ABC as a costing method:
Activity based costing is one of the best costing method with the help of which the company can
able to identify the realistic cost of manufacturing for specific products. With the help adoption of
this costing method, the company able to allocate manufacturing overheads more accurately to
products and process that use in the particular activity. It is because in this method, the
management of the company need to allocate the overhead cost to activity based on the cost
drivers. The impact of which, the company able to determines the product profit margin more
precisely. It is also best for identifying the processes which have unnecessary and wasted costs.
However, on the other hand, the disadvantage of this costing method is such that collection and
preparation of data under ABC is quite time-consuming (Manes-Rossi, Nicolò and Argento, 2020).
The result of which managers sometime get distracted from its goals which might leads to heavy
financial goals. By the way, this method is not appropriate for the companies where the proportion
of overhead cost is small as compared to total operating costs.