AFE5004-B Management Accounting.
AFE5004-B Management Accounting - University of Bradford
Problem 1
Bradford Watch Company manufactures luxury and sports watches both for male and female customers. The luxury watches are famous for the high-end design materials while the sports watches are popular for their utilities.
The company uses a traditional costing system in assigning overhead costs to the products on the basis of direct labour hours. However, the Production Manager seeks to replace the existing system with the Activ-ity-based Costing (ABC) system to keep control over costs and offer more competitive pricing. After re-viewing the existing costing system and interviewing the company`s personnel in relevant departments, the accountant compiled a report highlighting resources and costs involved in manufacturing watches per month:
1. The following table lists out the overhead cost:
| Activity cost pool | Overhead cost () | Additional Notes |
| Job-order set up | 33,000 | |
| Procurement and placement | 360,000 | |
| Installation of winding system | 195,000 | An auto winding system is fitted with every watch |
| Quality inspection (machine) | 60,000 | |
| Quality inspection (manual) | 21,000 | |
| Finishing | 140,000 | Hand-made finishing |
| Packaging and delivery | 44,250 | The company packages and delivers watches in batches containing 10 watches per batch. On an average, the packaging and delivery cost is the same for all batches (10 watches= 1 batch) |
| Factory cleaning services | 30,000 | A cost that is not consumed by any of the products |
2. The company pays 8 per direct labour hour
3. The following table lists out some key figures for this firm:
| Description | Quantity |
| Number of watches | 1,500 units |
| Direct labour hours | 7,000 hours |
| Machine hours | 14,000 hours |
| Number of job orders | 110 |
| Inspection hours using machine | 800 hours |
| Number of cycles for procurement and placement | 2,400 times |
Required:
a) Calculate the manufacturing overhead absorption rate using the traditional absorption costing system
b) What would be the sales price of the following two products using the ABC system if the company adds 30% mark-up on total allocated costs?
| Model | Luxury | Sports |
| Category | Female | Male |
| Job order number | LF-340& LF-341 | SM-119& SM-120 |
| Number of units | 30 | 50 |
| Direct materials ( per unit) | 85 | 55 |
| Direct labour hours | 200 | 250 |
| Machine hours | 225 | 750 |
| Inspection hours using machine | 12 | 40 |
| Number of cycles for procurement and placement | 50 | 80 |
c) Given the value in a) and b), please brief explain the differences between traditional absorption costing approach and Activity Based Costing (ABC) approach.
d) Discuss how allocation of customer-related overhead cost can lead to better decision making within firms with reference to the case below.