Introduction

Part A of the case study (traditional costing)

AKS Limited makes and sells three different motor parts: AKS001, AKS002 and AKS003

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 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

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)

1. Cost pool 1 labour related costs (1 mark)
2. Cost pool 2machine-related operating costs (1 mark)
3. Cost pool 3production scheduling and other set-up costs (1 mark)
4. 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)