Management Accounting

Formal Exams SP51, 2021 BXB1T2 Management Accounting for NonAccountants Question 3 [15 marks} FlightPath produces drones for use in normal environmental conditions. Recently it introduced a special model, which is intended for use in extreme and more difficult environments. Since its introduction, sales ofthe special model have been strong but overall company profits have declined steadily. The company currently assigns manufacturing overheads to products based on direct labour hours. Material and labour costs for last month were as follows: Normal model Special model Total Direct materials $230,000 $240,000 $520,000 Direct labour $330,000 $1?0,000 $500,000 Last month manufacturing overheads were $400,000 based on the production of T,200 units of the Normal model and 2,400 units of the Special model. Each Normal model uses 1.5 hours ofdirect labour while each Special model uses 1 hour. Company management thinks that the current method of costing may not be accurate and wonders if using activitybased costing [ABC] could help to cost its products more accurately. Company management recently hired a consultant who discovered that overhead costs could be separated into three core activities. These activities, and their costs and cost drivers for last month, are summarised in the table below: Usage of cost driver Activity Cost Cost driver Normal Special Total Setup $260,000 Number of production runs 140 60 200 Quality Control $50,000 Number of tests 15 35 50 Shipping 590,000 Number of shipments 200 100 300 Reguired: 1. Compute the unit costs of each model if the overheads are assigned using direct labour hours. [3 marks} 2. Compute the unit cost of each model if the overheads are assigned based on the ABC method. [5 marks) 3. Should FlightPath discontinue the Special model? In answering this question ensure that you discuss the implications of the ABC method and compare it to the direct labour hours method. [7' marks]