answer only question c
Carlos Camping Ltd manufactures tents and sleeping bags for the camping market. There are three separate production departments. The cutting department is automated with computer-controlled and laser-guided machines set up to cut the fabric components for batches of either tents or sleeping bags. The other separate departments assemble tents and sleeping bags by hand with operatives using traditional sewing machines. There are also two service departments: the material stores and the maintenance department The company currently operates a traditional absorption costing system in which product costs are calculated and consist of direct costs of materials and labour plus an apportionment of overhead costs by means of overhead recovery rates. In view of the fact that the staff in the cutting department are involved primarily in setting up machines and overseeing their activities they are classified as indirect rather than direct labour. Shown below is a summary of the budgeted overhead apportionment exercise for 2019. Overhead apportionment Company Total Production Depts. Cutting Tents Sleeping Bags $000 $000 $000 350 222 241 48 59 398 281 281 Total Service Depts $000 671 27 698 $000 Allocated Directly to Departments 1,484 Company Indirect costs 174 Total Overheads 1,658 Reapportionment of service departments Stores Maintenance Total Apportioned Overheads 1,658 132 210 740 27 140 448 27 162 470 -186 -512 20.000 Calculation of hourly rates Machine Hours Direct Labour Hours Machine Hour Rate Overheads Per Direct Labour Hour 48.000 37.000 $37.00 $9.33 $12.70 Direct Labour itself is charged to the Tents department at $17 per hour and to the Sleeping Bags department at $20 per hour. The company manufactures five products: tents in 'small', 'medium', and large sizes and sleeping bags in 'adult' and youths' sizes. Shown below is the information in respect of each product which is incorporated into the standard product costs for 2019 Tents Sleeping Bags Small Medium Large Aduit Youths Direct Materials $21.00 $28.00 $35.00 $24.50 $17.50 Cutting Dept. Machine hours 0.3 0.4 0.5 0.25 0.35 Direct Labour Hours 1.0 1.2 1.3 0.8 0.7 Question continues on next page Continued) Required a) Calculate standard product costs for each of the five products on the traditional absorption cost basis, using the information given. (4 marks) b) The company operates in a competitive market. The CEO, Tony, feels that the prices are dictated by the market. For 2019 he estimates the prices he will be able to charge for the Small, Medium and Large tents are $77, $91 and $105 respectively, and for the Adult and Youths Sleeping bags $70 and $56. Using the concept of Target Costing he aims to manufacture his products at costs that give him selling prices at cost plus 25%. For each of the five ranges of product calculate the 'Target Cost'. (2 marks) c) Tony wishes to investigate the effect of adopting Activity Based Costing for the company's standard product costs, and to see if they would align more closely to the target costs. There are three activities which are currently subsumed within the overhead costs and which could be identified individually. In the cutting department a considerable amount of time and resources are devoted to setting up the machine to cut the fabric to specific shapes and sizes. In both the tents and sleeping bags departments the overheads incorporate the cost of material movements and of inspections. He asks you to prepare product costs on an ABC basis identifying those activities. In the cutting department 50% of the apportioned expenditure ($740,000) relates to set ups and 50% should continue to be recovered on a machine hour basis (i.e. $18.50 per m/c hour). In the tents department and sleeping bags department (the total allocation of $918,000) can be split 50/50 between material movement and inspection. Tony advises that there will be 5,000 set ups per annum, 10,000 materials movements and 75,000 inspections. The products are manufactured in batches and the following information relates to batch sizes, set ups, material movements and inspections. Tents Sleeping Bags Small Medium Large Adult Youths Batch size (Units) 300 400 500 250 150 Set Ups per batch 10 10 10 5 5 Material movements per batch 20 20 20 10 10 Inspections per batch 600 800 1,000 500 300 i) Calculate rates per activity for set ups, material movements and inspections. (3 marks) ii) For each of products, calculate costs per unit of set ups, material movements and inspections. (3 marks) ati) For each of the products calculate full standard product costs on an ABC basis. (5 marks) M Comment on the outcome of the ABC exercise and discuss, where necessary, the steps Tony should take to establish a better alignment with the target cost. (3 marks) Carlos Camping Ltd manufactures tents and sleeping bags for the camping market. There are three separate production departments. The cutting department is automated with computer-controlled and laser-guided machines set up to cut the fabric components for batches of either tents or sleeping bags. The other separate departments assemble tents and sleeping bags by hand with operatives using traditional sewing machines. There are also two service departments: the material stores and the maintenance department The company currently operates a traditional absorption costing system in which product costs are calculated and consist of direct costs of materials and labour plus an apportionment of overhead costs by means of overhead recovery rates. In view of the fact that the staff in the cutting department are involved primarily in setting up machines and overseeing their activities they are classified as indirect rather than direct labour. Shown below is a summary of the budgeted overhead apportionment exercise for 2019. Overhead apportionment Company Total Production Depts. Cutting Tents Sleeping Bags $000 $000 $000 350 222 241 48 59 398 281 281 Total Service Depts $000 671 27 698 $000 Allocated Directly to Departments 1,484 Company Indirect costs 174 Total Overheads 1,658 Reapportionment of service departments Stores Maintenance Total Apportioned Overheads 1,658 132 210 740 27 140 448 27 162 470 -186 -512 20.000 Calculation of hourly rates Machine Hours Direct Labour Hours Machine Hour Rate Overheads Per Direct Labour Hour 48.000 37.000 $37.00 $9.33 $12.70 Direct Labour itself is charged to the Tents department at $17 per hour and to the Sleeping Bags department at $20 per hour. The company manufactures five products: tents in 'small', 'medium', and large sizes and sleeping bags in 'adult' and youths' sizes. Shown below is the information in respect of each product which is incorporated into the standard product costs for 2019 Tents Sleeping Bags Small Medium Large Aduit Youths Direct Materials $21.00 $28.00 $35.00 $24.50 $17.50 Cutting Dept. Machine hours 0.3 0.4 0.5 0.25 0.35 Direct Labour Hours 1.0 1.2 1.3 0.8 0.7 Question continues on next page Continued) Required a) Calculate standard product costs for each of the five products on the traditional absorption cost basis, using the information given. (4 marks) b) The company operates in a competitive market. The CEO, Tony, feels that the prices are dictated by the market. For 2019 he estimates the prices he will be able to charge for the Small, Medium and Large tents are $77, $91 and $105 respectively, and for the Adult and Youths Sleeping bags $70 and $56. Using the concept of Target Costing he aims to manufacture his products at costs that give him selling prices at cost plus 25%. For each of the five ranges of product calculate the 'Target Cost'. (2 marks) c) Tony wishes to investigate the effect of adopting Activity Based Costing for the company's standard product costs, and to see if they would align more closely to the target costs. There are three activities which are currently subsumed within the overhead costs and which could be identified individually. In the cutting department a considerable amount of time and resources are devoted to setting up the machine to cut the fabric to specific shapes and sizes. In both the tents and sleeping bags departments the overheads incorporate the cost of material movements and of inspections. He asks you to prepare product costs on an ABC basis identifying those activities. In the cutting department 50% of the apportioned expenditure ($740,000) relates to set ups and 50% should continue to be recovered on a machine hour basis (i.e. $18.50 per m/c hour). In the tents department and sleeping bags department (the total allocation of $918,000) can be split 50/50 between material movement and inspection. Tony advises that there will be 5,000 set ups per annum, 10,000 materials movements and 75,000 inspections. The products are manufactured in batches and the following information relates to batch sizes, set ups, material movements and inspections. Tents Sleeping Bags Small Medium Large Adult Youths Batch size (Units) 300 400 500 250 150 Set Ups per batch 10 10 10 5 5 Material movements per batch 20 20 20 10 10 Inspections per batch 600 800 1,000 500 300 i) Calculate rates per activity for set ups, material movements and inspections. (3 marks) ii) For each of products, calculate costs per unit of set ups, material movements and inspections. (3 marks) ati) For each of the products calculate full standard product costs on an ABC basis. (5 marks) M Comment on the outcome of the ABC exercise and discuss, where necessary, the steps Tony should take to establish a better alignment with the target cost
