Question
In your role as management accountant, you have been concerned about the divisions manufacturing overhead cost allocation model. You believe that part of the problem
In your role as management accountant, you have been concerned about the divisions manufacturing overhead cost allocation model. You believe that part of the problem AKS has with its existing range of electrical motor products is inaccurate costing.
Given the diversity in the range of electrical household products manufactured, AKS has contemplated switching the allocation of indirect manufacturing costs to an ABC system. Therefore, you decide to analyse the usefulness of an ABC system for AKS by applying this approach to the three different motor parts.
The analysis of $810 000 of indirect manufacturing costs indicates that they can be classified into four broad cost pools, with four different cost drivers. The budgeted indirect manufacturing costs for the motor parts product line for 2021 are shown in the following table.
| Indirect manufacturing cost pool | Cost driver | Annual budgeted costs |
| 1. Labour-related costs | Direct labour hours (DLHs) | $270 000 |
| 2. Machine-related operating costs | Machine hours | $350 000 |
| 3. Production scheduling and other set-up costs | Production runs | $120 000 |
| 4. Materials handling costs | Materials movements | $70 000 |
| Total budgeted costs for all cost pools | $810 000 | |
Budgeted production details for the motor part product line for 2021 are summarised in the next table.
| Cost Driver Transactions | AKS001 | AKS002 | AKS003 |
| DLHs per unit | 2.00 | 1.50 | 1.25 |
| Machine hours per unit | 1.00 | 3.00 | 3.00 |
| Number of production runs | 50 | 150 | 200 |
| Number of materials movements | 90 | 260 | 350 |
- Cost pool 1labour-related costs
| Cost pool 1labour-related costs | $270 000 | ||
| Budgeted direct labour hours (DLHs) |
| ||
| Model | Budgeted volume | DLHs per unit |
|
| AKS001 |
|
|
|
| AKS002 |
|
|
|
| AKS003 |
|
|
|
| Total budgeted DLHs |
| ||
| Total-labour related costs/total budgeted DLHs |
| ||
| Labour related cost pool rate |
| ||
- Cost pool 2machine-related operating costs
| Cost pool 2machine-related operating costs | $350 000 | ||
| Budgeted machine hours (MHs) |
| ||
| Model | Budgeted volume | MHs per unit |
|
| AKS001 |
|
|
|
| AKS002 |
|
|
|
| AKS003 |
|
|
|
| Total budgeted MHs |
| ||
| Total-machine related operating costs/total budgeted MHs |
| ||
| Machine-related operating cost pool rate |
| ||
- Cost pool 3production scheduling and other set-up costs
| Cost pool 3production scheduling and other set-up costs | $120 000 |
| Budgeted number of production runs |
|
| AKS001 |
|
| AKS002 |
|
| AKS003 |
|
| Total budgeted production runs |
|
| Total production scheduling and other set-up related costs / Total budgeted production runs |
|
| Production scheduling and other set-up cost pool rates |
|
- Cost pool 4materials handling costs
| Cost pool 4materials handling costs | $70 000 |
| Budgeted number of materials movements |
|
| AKS001 |
|
| AKS002 |
|
| AKS003 |
|
| Total budgeted materials movements |
|
| Total materials handling indirect costs / Total budgeted materials movements |
|
| Materials handling cost pool rate |
|
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Income Tax Fundamentals 2013
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
31st Edition
1111972516, 978-1285586618, 1285586611, 978-1285613109, 978-1111972516
