Question
Sofa So Good Australia manufactures a variety of sofa beds. Its costing system uses a simple cost system. There are two direct-cost categories and one
Sofa So Good Australia manufactures a variety of sofa beds. Its costing system uses a simple cost system. There are two direct-cost categories and one indirect-cost pool. The manufacturing overhead costs in the indirect cost pool are allocated to cost objects using direct manufacturing labour hours. In 2019, the company manufactured two styles of sofa beds: Regular and Deluxe. The following data were available for 2019.
| Regular | Deluxe | |||
| Sales | 5,000 units | 250 units | ||
| Direct material cost per unit | $120.00 | $250.00 | ||
| Direct labour cost per unit | $100.00 | $30.00 | ||
| Manufacturing overhead cost per unit | $150.00 | $45.00 | ||
| Upstream activity cost per unit (Research and design) | 60 | 110 | ||
| Downstream activity cost per unit (Marketing, distribution, and customer service) | 130 | 230 | ||
| Resources usage | Per Unit | Total | Per Unit | Total |
| Number of parts | 1 | 5,000 | 5 | 1,250 |
| Machine hours | 2 | 10,000 | 8 | 2,000 |
| Direct labour hours | 5 | 25,000 | 1.5 | 375 |
The cost accountant of the company, Mr Moris, recently attended a seminar on activity-based costing and is considering using it at the company to analyze and allocate manufacturing overhead costs. He met with all the key managers and they agreed that the following three key activities drive manufacturing overhead costs at Sofa So Good Australia.
| Manufacturing Activity | Budgeted Manufacturing Overhead Costs | Cost Driver Used As Allocation Base |
| Materials handling | $231,000 | Parts |
| Cutting and machining | 378,000 | Machine hours |
| Assembly | 152,250 | Direct manufacturing labour-hours |
| 761250 |
Required:
| (a) | Compute the Regular and Deluxe product cost per unit using the simple cost system. | (4 marks) |
| (b) | Compute the Regular and Deluxe product cost per unit using the Activity Based Costing system. | (8 marks) |
| (c) | Compare the cost per unit for each product in (a) and (b) above. Why do the simple and activity based costing systems differ in the cost per unit for each product? Why might these differences be important for Sofa So Good Australia Company? | (4 marks) |
| (d) | Activity based costing is the wave of the present and future. All companies should adopt it. Do you agree? Explain. |
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Advanced Accounting
Authors: Joe Hoyle, Thomas Schaefer, Timothy Doupnik
10th edition
0-07-794127-6, 978-0-07-79412, 978-0077431808
