Question 1 (A)

Oak Furniture Land (OFL) manufactures and sells oak furniture. It recently used an activity-based costing approach to refine the job-costing system for its game tables series. The resulting costing system has one direct-cost category (direct materials) and four indirect manufacturing cost pools. These four indirect-cost pools and their allocation bases were chosen by a team of product designers, manufacturing personnel and marketing personnel:

Indirect manufacturing cost pool Cost-allocation base Budgeted cost-allocation rate

1 Materials handling Component parts 1.50 per part

2 Machining Machine-hours 13 per hour

3 Assembly Assembly-line-hours 17 per hour

4 Inspection Inspection-hours 100 per hour

John Lewis recently purchased 30 luxury Mahjong tables. Each table has direct materials costs of 120, requires 15 component parts, 8 machine-hours, 6 assembly-hours and 15 minutes inspection-time. OFLs prior costing system had one direct-cost category (direct materials) and one indirect-cost category (manufacturing overhead, allocated using assembly-hours).

Required

1 Present overview diagrams of the prior job-costing system and the refined activity-based job-costing system.

[10 marks]

2 Calculate the unit manufacturing costs (using ABC) of each Mahjong table and the total manufacturing cost of the John Lewis order.

[15 marks]

3 What are reasons to change simpler job costing systems to ABC systems? Explain briefly.

[10 marks]

4 Implementing new costing systems in an organization can be challenging. What could be potential obstacles?

[15 marks]