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)