Exelon Racket (Pty) Ltd is a producer of sports equipment and manufactures two products: tennis and squash
Question:
Exelon Racket (Pty) Ltd is a producer of sports equipment and manufactures two products: tennis and squash rackets. The company has been in operation over the last 20 years, and production processes have undergone a radical change from labour intensive handmade wooden rackets to carbon fibre machine manufactured rackets. In the past, the company operated an absorption costing system. Due to the initial nature of the company, fixed manufacturing overheads were allocated using labour hours. This basis is still being used by the company. However, management is concerned that the current basis will lead to incorrect cost information resulting in poor decision making by management and the mispricing of rackets. Budgeted product information for the year ended 31 March 2021 is summarized in this table: Description Tennis Rackets (per unit) Squash Selling price 900 800Direct materials 200 100Direct labour 150 125Variable selling costs 20 20Fixed manufacturing overheads 1 500 000Fixed administration and distribution costs 2 400 000Production in units 10 000 6 000Sales in units 9 000 6 000There was no opening inventory of tennis or squash rackets at the beginning of the period. Also, there is no opening or closing work-in-progress or raw materials for both products. The fixed administration and distribution costs are allocated to tennis rackets and squash rackets based on units sold. A consultant, employed by the company to investigate alternatives to their current absorption costing system has made the following two recommendations: a) To operate a variable costing system in order to provide the relevant information required for management decision-making purposes. b) To operate an activity-based costing (ABC) and absorption costing system to meet the external financial accounting reporting requirements and for internal decision-making During his investigation, the consultant identified the major activities, cost drivers and the costs associated with each of these activities within the fixed manufacturing overhead costs. His findings are summarized in the table below: Major activities Cost driver Cost (R)Purchasing Number of purchase orders 200 000Machine set up costs Number of set ups 250 000Inspection Inspection hours 800 000Heating Units of power 250 000The consultant also recorded his findings regarding the utilization of the cost drivers by each of the two products. His findings are noted in the table below. Tennis Rackets (In total) Squash Rackets (In total)15 000 units of power 10 000 units of power3 000 purchase orders 2 000 purchase orders5 000 inspection hours 3 000 inspection hours3 500 set-ups 1 500 set-ups120 000 labour hours 30 000 labour hours
Accounting Information Systems
ISBN: 9780132871938
11th Edition
Authors: George H. Bodnar, William S. Hopwood