Assignment #3 Summer 2013 COMM 210 Introduction to Management Accounting Assignment 51 Total Marks Question 1: Total 32 marks

Arista Company produces two small engines for model boats (Engine A and Engine B). Both products pass through two producing departments. Engine B is by far the more popular of the two engines. The following data have been gathered for these two products. Product-related Data Engine A Engine B 30,000 300,000 $ 100,000 $ 1,000,000 40,000 400,000 20,000 200,000 40 60 800 1,200 Departmental Data Department 1 Department 2 Direct labour hours: Engine A Engine B Total Machine hours: Engine A Engine B Total Overhead costs: Setup costs (production runs) Inspection costs (production runs) Power (machine hours) Maintenance (machine hours) Total 30,000 45,000 75,000 10,000 355,000 365,000

Units produced per year Prime costs Direct labour hours Machine hours Production runs Inspection hours

10,000 160,000 170,000

10,000 40,000 50,000

$ 90,000 70,000 100,000 80,000 $ 340,000

$ 90,000 70,000 60,000 100,000 $ 320,000

Required: 1. Compute the overhead cost per unit for each product using a plant-wide per direct labour hour, unit-based rate. 2. Compute the overhead cost per unit for each product using departmental rates. In calculating departmental rates, use machine hours for Department 1 and direct labour hours for Department 2. Repeat using direct labour hours for Department 1 and machine hours for Department 2. 3. Compute the overhead cost per unit for each product using activity-based costing (round the rate to three decimals). 4. Comment on the ability of departmental rates to improve the accuracy of product costing.

Question 2 Total 19 marks

General Hospital operates an intensive care unit. Currently, patients are costed at the same rate per patient day for daily care services. Daily care services are broadly defined as occupancy, feeding, and nursing care. A recent study, however, revealed several interesting outcomes. First, the demands patients place on daily care services vary with the severity of the case being treated. Second, the occupancy activity is a combination of two activities: lodging and use of monitoring equipment. Since some patients require more monitoring than others, these activities should be separated. Third, the daily rate should reflect the difference in demands resulting from differences in patient type. To compute a daily rate that reflected the difference in demands, patients were placed in three categories according to illness severity; and the following annual data were collected: Activity Lodging Monitoring Feeding Nursing care Cost $ 900,000 1,200,000 100,000 945,000 $ 3,145,000 Cost driver Patient days Number of monitoring devices used Patient days Nursing hours Quantity 6,000 10,000 6,000 63,000

The demands associated with patient severity are also provided: Severity High Medium Low Required: 1. Suppose that the costs of daily care are assigned using only patient days as the cost driver. Compute the daily rate using this traditional unit-based approach of cost assignment. 2. Compute pool rates using the given cost drivers. 3. Compute the charge per patient day for each patient type using the pool rates from Requirement 2 and the demands on each activity. 4. Comment on the value of activity-based costing in service industries. Patient days 2,000 3,000 1,000 Monitoring devices 5,000 4,000 1,000 Nursing hours 40,000 18,000 5,000