Question
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
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)
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