ACC804 Revision Questions

Conventional and Activity-based product costing: manufacturer

The accountant for Halifax Photographic Supply Ltd has estimated the following activity cost
pools and activity drivers for the coming year:

Activity Budgeted Activity driver Budgeted level Cost per unit of

overhead cost for activity driver activity driver
Machine setups $200,000 No. of setups 100 $2,000 per setup
Material handling 100,000 Weight of raw 50,000 kilograms $2 per kilogram
material
Hazardous waste 50,000 Weight of 10,000 kilograms $5 per kilogram
control hazardous
chemicals used
Quality control 75,000 No. of 1,000 $75 per inspection
inspections
Other overhead 200,000 Machine hours 20,000 $10 per machine
costs hour
Total $625,000

An order for 1,000 boxes of film development chemicals has the following production
requirements:

Machine Setups 4 setups

Raw material 10,000 kilograms
Hazardous materials 2,000 kilograms
Inspections 10 inspections
Machine hours 500 machine hours

Required:

1. Calculate the total overhead that should be assigned to the order for development
chemicals.
2. What is the overhead cost per box of chemicals?
3. If Halifax Photographic Supply Ltd were to use a plantwide predetermined overhead rate
based on machine hours, calculate the rate per hour.
4. Under the approach in requirement 3, how much overhead would be assigned to the order
for development chemicals:
a. In total?
b. Per box of chemicals?
5. Explain why these two product costing systems result in such widely differing costs.
Which system do you recommend? Why?
 6. Calculate the unit cost of a production order for 100 specially coated plates used in film
development. In addition to direct material costing $120 per plate and direct labour
costing $40 per plate, the order requires the following:

Machine Setups 2 setups

Raw material 800 kilograms
Hazardous materials 300 kilograms
Inspections 3 inspections
Machine hours 50 machine hours

JIT Implementation: manufacturer

Farm Fresh Ltd is a manufacturer of farm equipment that is sold by a network of distributors
across Australia and New Zealand. The service Division manufactures spare parts for the various
models of farm equipment and sells these through the distribution centres. In January last year, a
JIT system was implemented in the Service Division to reduce inventory costs. This has now
been in place for a year, and the results are as follows:
- The average inventory of spare parts has now reduced from $1,100,000 to $300,000
- Projected annual insurance costs of $160,000 have declined by 60 per cent due to the
lower average cost of inventory.
- A leased 8,000 sq metre warehouse, previously used for inventory storage, was not used
all year. The division paid $22,400 annual rent for the warehouse and was able to sub-let
three quarters of the building to several tenants at $5 per sq metre per year. The
remainder of the space was not used.
- Two warehouse employees whose services were no longer needed were transferred to the
purchasing department of the Service Division in January last year at the start of the JIT
implementation, to assist in the coordination of the JIT program. Their total annual cost
was $76,000, which continued to be charged to the indirect labour portion of the fixed
overhead.
- Even though employees needed to work overtime to manufacture 7,500 spare parts, lost
sales due to stock-outs totaled 3,800 spare parts. The overtime premium amounted to
$11.20 per part manufactured. The use of overtime to manufacture spare parts was
virtually non-existent prior to the introduction of JIT.

Prior to the decision to implement JIT, the Service Division of Farm Fresh had completed its
budget. The budgeted income statement, without any adjustments for the JIT system, is as
follows:
 Farm Fresh Ltd
Service Division
Budgeted Income Statement (in $000s)
Sales revenue (280,000 spare parts) $12,320
Cost of goods sold:
Variable 5,320
Fixed 2,240 7,560
Gross margin $4,760
Selling and administrative expenses:
Variable $1,400
Fixed 1,110 2,510
Operating profit $2,250
Other revenue 150
Profit before interest and income taxes $2,400
Interest expense 300
Profit before income taxes $2,100

Required:

Calculate the cash saving (or loss) for the Service Division of Farm Fresh Ltd for the first year of
operation of JIT. (Hint: You need to include the forgone contribution margin on lost sales that
has resulted from the introduction of JIT.)

Target costing: manufacturer

Suppose you have just started a business to manufacture your latest invention, the Glammaglob
gadget. You estimate that after a few years on the market these gadgets will sell for about $250.
This estimate takes account of the introduction of similar devices by your competitors.
Furthermore, lets say you want to make a profit of $50 on each gadget sold.

Required:

1. What is the target cost for the glammaglob gadget?

2. What is the target profit?
3. What is the target price?
4. Suppose your engineers and management accountants conclude that your design of the
Glammaglob gadget will result in a unit cost of $230. How can you use the concept of
target costing to achieve your objective?

(Acknowledgment: All questions are adapted from Langfield-Smith, 2012 Management Accounting 6E)