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Assignment on

Activity Based Costing

Q.1
The controller of Delphi Automotive Systems Ltd decides to interview key managers
of the Design, Engineering, and Production departments. Each manager is to indicate
the consensus choice among department personnel of the cost driver of variable
manufacturing overhead costs for his or her department. Summary data are

D Variable Manufacturing Overhead Cost Driver


ep
ar
t
m
en
t
Design Rs 78,000 CAD design-
hours
Engineering 59,200 Engineering-
hours
Production 4,80,000 Machine-hours
6,17,200

Details pertaining to usage of these cost drivers for each of the three

contracts are:

Department Cost Driver Tata Maruti Hyundai


Motors Udyog Motors
Design CAD design- 220 400 160
hours
Engineering Engineering- 140 120 480
hours
Production Machine-hours 240 5,600 2,160

1. What is the variable manufacturing overhead rate for each department in current
year?
2. What is the variable manufacturing overhead allocated to each contract in current
year using department variable manufacturing overhead rates?
3. Compare your answer in requirement 2 to that in requirement 2 of Exercise 5-21.
Comment on the results.

Q. 2
The Samsonite Ltd. manufactures a complete line of fiberglass suitcases. Samsonite
has three manufacturing departments (molding, component, and assembly) and two
support departments (maintenance and power).

The sides of the cases are manufactured in the Molding Department. The frames,
hinges, locks, and so forth are manufactured in the Component Department. The cases
are completed in the Assembly Department. Varying amounts of materials, time, and
effort are required for each of the various cases. The maintenance Department and
Power Department provide services to the three manufacturing departments.

Samsonite has always used a plantwide manufacturing overhead rate. Direct


manufacturing labor-hours are used to allocate the overhead to each product. The
budgeted rate is calculated dividing the company’s total budgeted manufacturing
overhead cost by the total budgeted direct manufacturing labor-hours to be worked in
the three manufacturing departments.

Aditya, manager of Cost Accounting, has recommended that Samsonite use


department overhead rates. Aditya has projected operating costs and production levels
for the coming year. They are presented (in thousands) by department in the following
table:
Particulars Manufacturing department
Molding Component Assembly
Department operating data
Direct manufacturing labor-hours 500 2,000 1,500
Machine-hours 875 125 -
Department costs
Direct manufacturing materials Rs 24,800 60,000 Rs 2,500
Direct manufacturing labor 7,000 40,000 24,000
Manufacturing overhead 42,000 32,400 45,200
Total department costs 73,800 1,32,400 71,700
Uses of support departments
Estimated usage of maintenance resources in labor- 90 25 10
hours for coming year
Estimated usage of power (in kilowatt-hours) for 360 320 120
coming year

Estimated costs are Rs 8,000 for the Maintenance Department and Rs 36,800 for the
Power Department.
Required
1. Calculate the plantwide overhead rate for Samsonite Ltd. for the coming
year using the same method as used in the past.
2. Aditya has been asked to develop department overhead rates for
comparison with the plantwide rate. Follow these steps in developing the
department rates:
a. Allocate the Maintenance Department and Power Department costs to
the three manufacturing departments.
b. Calculate department overhead rates for the three manufacturing
departments using a machine-hour allocation based for the Molding
Department and a direct manufacturing labor-hour allocation base for
the Component Department and Assembly Department.
3. Should the Samsonite Ltd. use a plantwide rate or department rates to
allocate overhead cost to its products? Explain your answer.
4. Under what conditions should Samsonite Ltd. further subdivide the
department cost pools into activity-cost pools?
Q.3
Basista Coffee Ltd. (BCL) buys coffee beans from around the world and roasts,
blends, and packages them for resale. The major cost is direct materials; however,
there is substantial manufacturing overhead in the predominantly automated roasting
and packing process. The company uses relatively little direct labor.

Some of the coffees are very popular and sell in large volumes, whereas a few of the
newer blends sell in very low volumes (BCL) prices its coffee at budgeted cost,
including allocated overhead, plus a markup on cost of 30 per cent.

Data for the current year budget include manufacturing overhead of Rs 30,00,000,
which has been allocated on the basis of each product’s budgeted direct-labor cost.
The budget direct-labor cost for current year totals Rs 6,00,000. purchases and use of
materials (mostly coffee beans) are budgeted to total Rs 60,00,000.

The budgeted direct costs for one-kg bags of two of the company’s products are
Indian Malaysian
Direct materials Rs 42 Rs 32
Direct labor 3 3

BCL’s controller believes the existing costing system may be providing misleading

cost information. She has developed an activity-based analysis of current year

budgeted manufacturing overhead costs shown in the following table.

Activity Cost driver Cost driver rate


Purchasing Purchase orders Rs 5,000
Materials handling Setups 4,000
Quality control Batches 2,400
Roasting Roasting-hours 100
Blending Blending-hours 100
Packaging Packaging-hours 100

Data regarding the current year production of the Indian and Malaysian coffee follow.
There will be no beginning or ending materials inventory for either of these coffees.
Particulars Indian Malaysian
Expected sales 1,00,000 kgs 2,000 kgs
Purchase orders 4 4
Batches 10 4
Setups 30 12
Roasting-hours 1,000 20
Blending-hours 500 10
Packaging-hours 100 2

Required
1. Using BCL’s existing costing system:
a. Determine the company’s current year budgeted manufacturing
overhead rate using direct-labor cost as the single allocation base.
b. Determine the current year budgeted costs and selling prices of 1 kg of
Indian coffee and 1 kg of Malaysian coffee.
2. Use the controller’s activity-based approach to estimate the current year
budgeted cost for 1 kg of
a. Indian coffee
b. Malaysian coffee
Allocate all costs to the 1,00,000 kg of Indian and the 2,000 kg of Malaysian.
Compare the results with those in requirement 1.
3. Examine the implications of your answers to requirement 2 for BCL’s pricing
and product-mix strategy.

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