Case Study 5

Sallan Industrial Investment (SII) LLC is one of the leading FMCG manufacturing company in Oman based in Sohar Industrial Estate, Sohar. It produces a wide range of home care and personal product including high foam detergent powder under the brand names Sana and Ideal. The cost records of the company reveal the following information for the month April 2020:

Product

Output (in units)

Selling Price per unit ( in RO) Direct material @ RO 6.50 per Kg Direct Wages @ RO 5 per hour No. of quantity produced per batch Setup time per batch (Hours)

The Indirect costs for the month are as under:

Sana Ideal

30,000 10,000 55 90 13 32.5

5 6.5 120 50

3 4

Factory Wages

Stores Receiving Costs Set up costs

Material Handling Costs Shipment costs Inspection Costs

137,600 17,150 155,000 318,000 40,000 20,250

At present, the company absorbs the indirect costs based on the output. The Management Accountant of the company, after making a rigorous analysis of the data, decided to shift from the absorption technique to Activity Based Costing technique and also to treat factory wages as direct cost. The Management accountant identified RO 90,000 for product Sana and the balance for product Ideal. The data relevant to activities and products are as follows:

Activity Cost Pool

Stores Receiving Costs Material Handling Costs Shipment costs Inspection Costs

Setup Costs Factory Wages

Cost driver

Sana

Ideal

30

3000

50

2250

Requisitions raised 70 Orders Executed 4500 Number of Shipments 150 No. of Inspections 4500 Setup hours

Direct labour hours

Required :

a) The total cost and profits of both the products based on the absorption costing

technique. (3 Marks)

b) The total cost and profits of both the products assuming the indirect costs are absorbed based on activity based costing and also assuming factory wages as direct

cost. (4 Marks) c) The amount of cost distortion for each product and give your opinion on the decision of the Management Accountant. (50-100 words) (3 Marks)

Produc