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Barnmill Ltd. produces three products from a single common process. Last month the inputs into the common process were: Direct materials 1,000 kg @ 55
Barnmill Ltd. produces three products from a single common process. Last month the inputs into the common process were: Direct materials 1,000 kg @ 55 per kg Direct labour 1,000 hours @ 15 per hour Production overheads 68,600 900 units of output emerged from the common process as follows: Product XR4: 50% Product YD8: 40% Product ZT5: 10% Each of the products required further processing before they can be sold. Information on further processing costs together with selling prices for each product is outlined below: Product XR4 Further processing materials (per unit) 200 Further processing labour (per unit) 80 Selling price (per unit) 800 Product YD8 400 100 1,000 Product ZT5 440 120 1,200 Currently the organisation apportions joint costs to products on the basis of physical output (physical measures method). a) The Managing Director has recently been advised that apportioning joint costs using the physical measures method is not always appropriate. Briefly discuss this viewpoint and prepare calculations to determine the profit or loss earned from each product using two alternatives methods to apportion joint costs. Assess whether each of these two alternative methods represents an improvement on the firm's current system. (28 marks) b) Another division of the firm has just completed the implementation of Activity Based Costing (ABC), previous to this the division used a Traditional Costing System (assigned overheads on the basis of labour hours). To facilitate the smooth transition to the new system, cost information for the division's three products for last month was determined both under the previous costing system and the new ABC system as summarised in the table below. On receipt of this information the Managing Director expressed some concerns: firstly he questioned why the overall profitability was the same under both systems and secondly he queried how ABC can actually be of benefit to the firm. Product Product Alpha Beta Product Delta Total 45 50 60 Unit cost calculated under traditional costing basis Profitability of products under traditional costing basis 45,000 60,000 22,000 127,000 32 56 70 Unit cost calculated under ABC basis Profitability of products under ABC basis 82,000 53,000 127,000 (8,000) loss Write a report to the Managing Director explaining the difference between the two costing approaches and addressing the concerns that he raised. (14 marks) c) Discuss how probability information enables the management accountant to support managerial decision-making under conditions of uncertainty
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