FINANCIAL DECISION MAKING

Section 1 contains two mini-scenarios with short questions. Each mini-scenario contains 5 short questions each worth 2 marks (a total of 10 marks for each mini-scenario)

Mini-scenario 1 Midland Inc (MI) operates an activity-based costing system in each of its factories, all located in the UK. The production director of MI has forecast the following information for the Welsh Factory next year. Cost pool Cost E Drivers/total activity Cost per activity E Production set-ups 230,000 set-ups/920 250.00 per set-up Product testing 330,000 tests/3,000 110.00 per test Component supply/storage 15,000 component orders/500 30.00 per order Customer orders/delivery 150,000 customer orders/1,000 150.00 per order General overheads 600,000 labour hours/300,000 2.00 per hour The Nezmaster. MI expects orders this product (the Nezmaster) next year to be a total of 10,000 units made up of: 100 orders of 70 units per order 30 orders of 100 units per order MI holds no inventories of Nezmaster and plans to produce the order requirement in production runs of 1,000 units. Other information on the Nezmaster is as follows: One order for components will be placed prior to each production run. Six tests will be made during each production run to ensure that quality standards are maintained. . Component costs of each Nezmaster are $1.53 per unit. Direct labour cost for the Nezmaster is 15 minutes per unit at $12.80 per hour.Required: 1. Which of the following statements is/are false? A. Activity based costing provides much better insight into what drives overhead costs B. All corporate overheads can be allocated to specific activities using activity- based costing C. Activity based costing can only be applied to production overheads (2 marks) 2. Which of the following statements about overheads in the company made by the production director is/are false? A. Traditional absorption costing tends to under-allocate overhead costs to low volume products B. For long term variable overhead costs, the cost driver will be the volume of activity C. Neither statement (2 marks) 3. If the board of directors is thinking about switching to an activity-based budgeting (ABB) system, which of the following statements is/are true? A. ABB is not useful when an organisation has a significant level of overheads B. ABB should not be used in a Total Quality Management environment C. Neither statement (2 marks) 4. Using activity-based costing to allocate overheads, what is the overhead cost per unit of the Nezmaster? Show all workings. (2 marks) 5. What is the total cost per unit of the Nezmaster? Show all workings. (2 marks) Total 10 marks