E8.32

(appendix) Assigning costs to activity centres: manufacturer

Top Tech Ltd. manufactures sophisticated six-tuner personal video recorders and has decided to develop an activity-based product costing system to assign labour and overhead costs to products. The table below lists Silverwater's costs during the current year and the resource drivers to be used to assign these costs to activity centres.

Top Tech Ltd

Labour and Overhead Costs

Total cost

Resource driver

Total amount of resource driver

Wages

$ 720 000

Headcount

100 employees

Building costs

240 000

Floor area

10 000 square metres

Energy

360 000

Kilowatt hours

250 000 kilowatt hours

Other

60 000

Headcount

100 employees

Total labour and overhead costs

$1 380 000

Required:

1

Calculate the costs assigned to the Assembly Centre given its usage of resource drivers during the year, as follows:

Number of employees

20

Floor area

1 000 square metres

Power used

10 000 kilowatt hours

2

The costs listed above are not individual costs but a series of costs grouped together into cost categories such as wages, building costs and so on. Explain why Top Tech combined the costs from its general ledger into cost categories. Under what conditions is it appropriate to combine costs into cost categories? Give three examples of the types of costs likely to be included in each category.

3

What is meant by the termresource driver?Can you suggest a better basis for assigning 'Wages' to activity centres?

P8.37

Activity-based costing: service firm

Mel Snow is the manager of a firm, Taxation Matters, which specialises in the preparation of income tax returns. The firm offers two basic products: the preparation of income tax returns for wage and salary earners and the preparation of income tax returns for small businesses. Any clients requiring more complex services are referred to Mel's brother Roger, who is a partner in a large firm of chartered accountants.

The processing of wage and salary tax returns is quite straightforward, and the firm uses a software package to process data and print the return. A software package is also used to prepare returns for small businesses, although more information is required, particularly about business expenses.

Mel has only recently joined Taxation Matters and he is concerned about the firm's pricing policy, which sets a flat fee of $60 per return for wage and salary clients and $300 for small businesses. He decides to use activity-based costing to estimate the costs of providing each of these services.

At the end of the year, Mel reviewed the company's total costs and activities, resulting in the following list:

Activity

Activity cost

Activity driver

Qty. of activity driver

Interview salaried client

$ 60 000

No. of wage and salary clients

8 000

Interview business client

75 000

No. of business clients

2 000

Obtain missing data

600 000

No. of follow-up calls

8 000

Input data

120 000

No. of data entries

400 000

Print return

90 000

No. of returns

10 000

Verify return with client

180 000

No. of hours

6 000

Rectify errors

90 000

No. of errors

6 000

Submit return

30 000

No. of returns

10 000

Total costs

$1 245 000

In identifying the activities required for each type of return, Mel noted the following:

(a)

Clients are interviewed only once per return.

(b)

All follow-up calls to obtain missing data relate to business returns; on average, each business tax return requires four follow-up calls.

(c)

Processing a wage and salary tax return requires 20 data entries, whereas a business return requires 120 data entries.

(d)

On average, it takes 22.5 minutes to verify a wage and salary tax return, whereas it takes one and a half hours to verify a business return.

(e)

All errors relate to business returns; on average, there are 3 errors per business return.

Required:

1

Use activity-based costing to estimate the cost of preparing:

(a)

a wage and salary tax return

(b)

a business tax return.

2

In the light of your answers to requirement 1, evaluate the firm's pricing policy.