ACY3005 Management Accounting 2

Question 1 (20 marks) Lots of Fruits Limited buys and grows different types of fruit, and sells them as two kinds of fruit boxes, Citrus and Tropical. The estimated income statement for the coming year is below. Lots of Fruits Limited Income Statement Sales $ 816,000 Cost of goods sold (675,000) Gross margin 141,000 Selling and administrative expenses (48,700) Net operating prot $92,300 The company currently calculates the protability of its two products using a traditional costing system which allocates overhead costs on the basis of direct labor hours. The estimated total overhead for the coming year is $75,000. The direct labor cost is $40 per hour. Details about the two products are as follows: Citrus Tropical Estimated annual sales and production 2,400 boxes 4,800 boxes Selling price per unit $100 $120 Direct materials per unit $50 $75 Direct labor hours per unit 15 min 30 min Direct labor costs per unit 7 7 Janet Tse, the CFO, is considering using an Activity-Based Costing (ABC) costing system to more accurately assign costs to the two products. Out of the total selling and administrative expenses, Janet's team estimates that $14,000 and $17,500 can be directly traced to Citrus and Tropical uit boxes, respectively. The rest are organization-sustaining costs. The overhead is composed of the following items, with the activities proposed by Janet's team: Overhead Expected activity Qitrus Tropigal Delivery costs (number of deliveries) $26,000 400 600 Product-sustaining costs (number of products) 7,800 1 1 Utilities and other growing-related stafng 24,000 ? ? costs (direct labor hours) Other (organization-sustaining costs) 17,200 NA NA Total overhead costs $75,000 Required: (a) Calculate the pre-determined overhead rate to allocate overhead costs under the traditional costing system. (2 marks) (b) Compute the product margins for the two products under the traditional costing system. (4 marks) (c) Calculate the activity rates for allocating costs under the ABC system. (4 marks) (d) Compute the product margins for the two products under the ABC system. (5 marks) (e) Explain why product costs differ between the traditional and ABC systems. (5 marks) 2 Question 2 (20 marks} Susan Company manufactures a variety of tea pots. The demand for the pots has kept increasing and the management foresees that the production line would not have enough capacity to satisfythe market. The company then makes the following estimates for next year: Product Demandgunits) Price ($) Direct materials ($) Direct labor[$) A 8,000 15 4.5 6 B 10,000 18 3.5 8 C 24,000 10 2.5 4 D 125,000 4.5 0.8 1.6 Additional information: (i) The factory has a capacity of 10,000 direct labor hours per annum. (ii) The direct labor rate is estimated at $40 per hour. (iii) Total xed cost per annum is $620,000. (iv) Variable manufacturing overheads are $8 per direct labor hour. Required: (a) Determine the contribution margin per direct labor hour for each product. (6 marks) (b) To maximize the total contribution, calculate the number of units of each product that the company to be produced and their respective contributions for the year. (8 marks) (c) Determine the highest direct labor rate that the company would be willing to pay for additional capacity. (3 marks) (d) If the company does not want to loss sales, suggest some ways other than (c) for the company to meet the production quantity for the expected sales. (3 marks) End of the paper