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Assignment on Managerial Accounting (pdf)

   

Added on  2021-04-17

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MANAGERIALACCOUNTINGSTUDENT ID:[Pick the date]
Assignment on Managerial Accounting (pdf)_1
Question 1The consulting group recommended the firm to use Activity Based Costing (ABC) instead ofthe traditional costing. The reason that has been cited is that ABC leads to more accurateallocation of the overheads cost which is indeed accurate. In the current costing system, theoverhead cost is allocated on the basis of the plantwide rate which is linked to direct labourhours consumed. Clearly, this process undermines the underlying difficulty that is involved inthe production of S-17 chemical due to which the overhead cost of this product may besignificantly higher. Additionally, the fact that the competitors are able to sell X-14 at lowerthan the cost of the company further strengthens the rationale to shift to ABC as it might bepossible that the overhead costs may be over-allocated to X-14 while under-allocated to S-17.As a result, the customers are willing to buy the same quantity of S-17 even if a 25% hike inprices is put in place by the company. Further, literature review also provides support in favour of ABC as compared to traditionalcosting systems such as absorption costing. This is because the ABC system involvesbreaking down the overhead tasks into smaller activities and identifying the respective costdrivers of each of these sub-activities. Further, the activity levels associated with differentproducts is computed so that the allocation of the overheads cost can be carried out accurately(Northington, 2012). This ensures not only better costing of the individual products but alsomore competitive pricing. Considering the relative performance of the two products for thecompany, conducting the ABC analysis is indeed a prudent suggestion by the consultinggroup. A potential downside of the recommendation is the incremental cost associated butconsidering that the management is looking to shut down production of a product, this isrequired in order to make a prudent decision (Petty et. al., 2015).Question 2Plantwide Overhead Rate ComputationThe following information has been provided.Total overhead costs incurred in the production of the two chemicals = $ 6,990,000Total direct labour hours = 250,000 + 22,500 = 272,500
Assignment on Managerial Accounting (pdf)_2
Hence, plantwide overhead rate = 6990000/272500 = $ 25.65 per direct labour hourDirect labour hour per unit computationProduction quantity of X-14 = 1,000,000Production quantity of S-17 = 200,000Direct labour hours required for X-14 = 250,000Direct labour hours required for S-17= 22,500Hence, direct labour hours per unit of X-14 = (250000/1000000) =0.25 hoursAlso, direct labour hours per unit of S-17 = (22500/200000) = 0.1125 hoursOverhead cost per unit computationOverhead cost per unit for X-14 = 0.25*25.65 = $6.41Overhead cost per unit for S-17 = 0.1125*25.65 = $2.89Unit Gross Margin ComputationUnit selling price of X-14 = $15.93Unit total cost for X-14 = 6.41 + 4.27 = $10.68Hence, gross margin per unit for X-14 = 15.93 – 10.68 = $ 5.25Unit selling price of S-17 = $12Unit total cost for S-17 = 2.89 + 3.13 = $6.02Hence, gross margin per unit for S-17 = 12– 6.02 = $ 5.98
Assignment on Managerial Accounting (pdf)_3

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