Question
Introduction Part A of the case study (traditional costing) AKS Limited makes and sells three different motor parts: AKS001, AKS002 and AKS003. AKS001* AKS002* AKS003*
Introduction
Part A of the case study (traditional costing)
AKS Limited makes and sells three different motor parts: AKS001, AKS002 and AKS003.
AKS001*
AKS002*
AKS003*
Pictures are symbolic only. I don't have any Copywrite, and these pictures are taken from google for visual representation only.
Sales and production figures
The total forecast sales and production volume for the three motor parts for 2021 are 15 000 units. Expected sales volumes for each model are shown in the following table.
AKS001
AKS002
AKS003
Sales and Production Volume
10 000
3 000
2 000
Direct costs of production
Prime costs are the direct materials and direct labour for each product. The estimated prime costs for the three products are shown in the following table.
Prime Cost Element
AKS001
AKS002
AKS003
Direct materials per unit
$55.00
$85.00
$105.00
Direct Labour per unit
$40.00
$30.00
$25.00
Total prime cost per unit
$95.00
$115.00
$130.00
Overheads
Indirect manufacturing costs are budgeted to be $810 000. These are currently allocated across the three product lines based on direct labour-hours (DLHs), as shown in the following table.
Cost driver transaction
AKS001
AKS002
AKS003
DLHs per unit
2.00
1.50
1.25
Part B of the case study (activity-based costing)
Allocating indirect costs with activity-based costing
In your role as management accountant, you have been concerned about the division's 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
Part C of the case study
CEO of AKS Limited was in a seminar and heard about the JIT approach. She wondered what JIT is and whether it would be a good approach for AKS Limited, based in Fiji. AKS Limited get the supplies from Australia and New Zealand and a couple of other components from India. CEO has approached you, the management accountant for the company, to analyse the benefits of JIT and its usefulness for the company.
Required
1.Use the current indirect manufacturing cost allocation method based on direct labour hours (DLHs) to calculate the budgeted: (total 5 marks)
(a) indirect manufacturing cost rate(1 mark)
(b) indirect manufacturing cost for each product(2 marks)
(c) total manufactured cost per unit for each product.(2 marks)
2.Calculate the budgeted indirect manufacturing cost rate for the four ABC cost pools(total 4 marks)
(i)Cost pool 1 - labour - related costs (1 mark)
(ii)Cost pool 2machine-related operating costs(1 mark)
(iii)Cost pool 3production scheduling and other set-up costs(1 mark)
(iv)Cost pool 4materials handling costs(1 mark)
3.Use the ABC method to calculate the budgeted indirect manufacturing cost per unit for each product range. Calculate the difference in costs between the ABC method and the traditional approach in requirement 1.(one product X 3 marks)(total 9 marks)
4.Write a report to the CEO of AKS Limited explaining the concept of JIT and whether will it be a good option for the company to adopt the JIT approach. (total 7 marks)
*****END OF CASE STUDY 1*****
Calculation guide
Requirement 1
Part (a) calculation of indirect manufacturing cost rate per DLH
Model
Budgeted volume X
DLHs per unit =
Total DLHs
AKS001
AKS002
AKS003
2 000
1.25
2 500
Total DLHs for product line
Total budgeted indirect manufacturing costs/total DLHs
Indirect manufacturing cost rate
Part (b) Indirect manufacturing cost
Indirect manufacturing cost
AKS001
AKS002
AKS003
Indirect manufacturing rate per DLH
DLHs per unit
Indirect manufacturing cost per unit
Budgeted sales volume
Indirect manufacturing cost
Part (c) Total manufactured cost per unit
Indirect manufacturing cost
AKS001
AKS002
AKS003
Direct materials per unit
$105.00
Direct labour per unit
$25.00
Total prime costs per unit
$130.00
Indirect manufacturing cost per unit
Total manufactured cost per unit (Total prime costs per unit + Indirect manufacturing cost per unit)
Requirement 2 calculation of cost pools
(a)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
(b)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
(c)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
(d)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
Requirement 3 ABC for AKS001, AKS002, AKS003
AKS001(3 marks)
Cost Pools
Cost Pool Rate
No # of cost driver
Indirect Manufacturing cost
%
1. Labour-related
$10.00
$20 000
$200 000
54.9%
2. Machine-related
3. Scheduling set-up
4. Materials handling
Total indirect manufacturing costs allocated to AKS001
100%
Units Produced
ABC indirect manufacturing cost per unit
(Total indirect manufacturing costs allocated to AKS001 / Units produced)
Traditional indirect manufacturing cost per unit
Difference in indirect manufacturing costs per unit between the two systems
AKS002(3 marks)
Cost Pools
Cost Pool Rate
No # of cost driver
Indirect Manufacturing cost
%
1. Labour-related
2. Machine-related
3. Scheduling set-up
4. Materials handling
Total indirect manufacturing costs allocated to AKS002
100%
Units Produced
ABC indirect manufacturing cost per unit
(Total indirect manufacturing costs allocated to AKS002 / Units produced)
Traditional indirect manufacturing cost per unit
Difference in indirect manufacturing costs per unit between the two systems
AKS003(3 marks)
Cost Pools
Cost Pool Rate
No # of cost driver
Indirect Manufacturing cost
%
1. Labour-related
2. Machine-related
3. Scheduling set-up
4. Materials handling
Total indirect manufacturing costs allocated to AKS003
100%
Units Produced
ABC indirect manufacturing cost per unit
(Total indirect manufacturing costs allocated to AKS003 / Units produced)
Traditional indirect manufacturing cost per unit
Difference in indirect manufacturing costs per unit between the two systems
Requirement 4 The concept of JIT and adoption in AKS Limited (not more than 300 words)
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