QUESTION 1

The financial controller for Magik Fertilizers Sdn Bhd has established the following activity cost pools and cost drivers.

Activity Cost Pools

Budgeted Overhead Costs

Cost

Driver

Budgeted Level for Cost Driver

Activity Rate

Machine setups

RM250,000

Number of setups

125

RM2000 per setup

Material handling

RM75,000

Weight of raw material

18,750 kg

RM4 per kg

Hazardous waste control

RM25,000

Weight of hazardous chemical used

2,500 kg

RM10 per kg

Quality control

RM75,000

Number of inspections

1,000

RM75 per inspection

Other overhead costs

RM200,000

Machine hours

20,000

RM10 per machine hour

Total

RM625,000

An order for 1,000 bags of Nitrogen Plus fertilizer has the following production requirements.

Machine setups

5 setups

Raw materials

5,000 kg

Hazardous materials

1,000 kg

Inspections

10 inspections

Machine hours

500 machine hours

Required:

a.Compute the total overhead that should be assigned to the Nitrogen Plus fertilizer using activity-based costing.

(7marks)

b.Determine the overhead cost per bag of the fertilizer using activity-based costing.

(3marks)

QUESTION 2

a.Sun Pottery Sdn. Bhd. is divided into two operating departments: Pottery and Retail and the departmental overhead rates for both departments are based on direct labour hours. The Pottery Department employs 50 people and the Retail Department employs 20 people. Each person in these two departments works for 2,200 hours per year. The company also has two support departments: Power Department and General Factory Department and the company allocates both department costs to each operating department. Power costs are allocated on the basis of the number of machine hours and general factory costs on the basis of square footage. No effort is made to separate fixed and variable costs, however, only budgeted costs are allocated. Allocations for the coming year are based on the following data:

Power

General factory

Pottery

Retail

Overhead costs (RM)

160,000

170,000

98,000

60,000

Machine hours

2,000

1,000

6,900

3,100

Square footage

2,000

1,700

4,000

6,000

Required:

Note: Round the allocation ratios to four significant digits. Round all amounts to the nearest RM.

(i)Calculate the overhead rates per direct labour hour for the Pottery Department and Retail Department using the sequential method. The support departments are ranked in order of highest cost to lowest costs.

(7 marks)

(ii)Estimate the overhead cost of a product using 3 direct labour hours in the Pottery Department and 4 direct labour hours in the Retail Department using the overhead rates estimated in (i).

(3marks)

(iii)In addition to the sequential method, overhead cost can be allocated using the direct and reciprocal method. Which method would you recommend? Justify your answer.

(4marks)

b.Describe the service costing system that is most appropriate for:

(i)Professional service firms

(ii)Service shops

(iii)Mass service entities

c.Suppose Magik Fertilisers Sdn Bhd were to use a single predetermined overhead rate based on machine hours. Compute the rate per machine hour. How much of the total overhead would be assigned to Nitrogen Plus fertilizer order?

(7 marks)

d.Explain why these two product costingsystems result in such widely differing costs. Which system would you recommend? Why?

(8 marks)

QUESTION 3

WCC Sdn Bhdmanufactures metal cans used in the food-processing industry. A case of cans sells for RM50. The variable cost of production for one case of cans are as follows:

Direct material

RM15

Direct labour

5

variable manufacturing overhead

12

Total variable manufacturing costper case

RM32

Variable selling and administrative cost amount to RM1 per case. Budgeted fixed manufacturing overhead is RM800,000 per year and fixed selling and administrative cost is RM75,000 per year.The following data pertains to the company's first three years of operation.

2013

2014

2015

Planned production (in units)

80,000

80,000

80,000

Finished goods inventory (units), January 1

0

0

20,000

Actual production( in units)

80,000

80,000

80,000

Sales (in units)

80,000

60,000

90,000

Finished goods inventory (in units), December 31

0

20,000

10,000

Actual costs were the same as the budgeted costs.

Required:

a.Prepare income statements for WCC for the first three years of operation using(i) absorption costing and (ii) variable costing.

(16 marks)

b.Reconcile operating income of WCC reported under absorption costingand variable costingfor each of its first three years of operation.

(3marks)

c.Explain why some management accountants believe that absorption costing may provide an incentive for managers to overproduce inventory.

(5 marks)