PAST YEAR QUESTION

Semester A182 - Q3

Residensi Bidara Sdn Bhd (RBSB) produces two types of T-shirts for customers who love extreme activity like hiking. Superior T-shirt is made of high quality fabric and printed using sublimation technique. The type of fabric used is a microfiber interlock which is suitable for a variety of outdoor activities. On the other hand, Regular T-shirt is made of moderate quality fabric and printed using ordinary technique. Regular T-shirt uses polyester fabric that enables quick drying.

RBSB uses direct labour hours as a basis to calculate plantwide overhead rate and the production data for the company is as follows:

Superior

Regular

Units produced

19,500

95,500

Direct materials

RM247,125

RM795,025

Direct labour

RM63,000

RM264,600

Direct labour hours

5,250

22,050

Production runs

280

440

Inspection hours

550

900

Number of setups

120

180

Number of moves

65

85

Machine hours

7,250

9,250

Total overhead cost for RBSB is RM136,500. The information relating to activity and activity cost for RBSB is shown below:

Activity

Activity Cost

Setting up equipment

RM37,500

Machining

RM33,000

Production scheduling

RM18,000

Inspecting products

RM21,750

Moving materials

RM26,250

Five cost drivers are identified for the above activities. They are production runs, inspection hours, number of setups, number of moves and machine hours.

Miss Asma' Najihah, the financial controller of RBSB has calculated the unit cost for both T-shirts using the plantwide overhead rate. Below is the detail of her calculation:

Plantwide overhead rate

= RM136,500 27,300 direct labour hours

= RM5.00 per direct labour hour

Superior

Regular

Direct materials

RM247,125

RM795,025

Direct labour

RM63,000

RM264,600

Overhead (5,250 x RM5; 22,050 x RM5)

RM26,250

RM110,250

Total costs

RM336,375

RM1,169,875

units produced

19,500

95,500

Unit cost

RM17.25

RM12.25

Top management of RBSB has become increasingly concerned about the accuracy of its traditional costing system and is considering using Activity-Based Costing (ABC) to improve product costing accuracy.

REQUIRED:

(a)Calculate the unit cost of Superior and Regular T-shirts using ABC.

(b)Determine which product is undercosted and overcosted.

(c)Explain batch level activity under ABC.

(d)Explain why traditional costing is less superior than ABC in allocating overhead cost.

(e)Explain TWO (2) ways how costs are treated under ABC.