Jack and Larry Ltd is a road construction company in the UK which currently uses absorption costing for pricing its contracts. Their new accountants have recommended to the board that the business should experiment with an Activity Based Costing system, as it provides more accurate costing and pricing information. Whilst the manufacture of roads is very labour intensive, a large amount of machinery and equipment is used which incurs considerable overheads. The current annual budget for the company is as follows: Sales revenue Direct materials Direct labour Overhead costs Operating income £000s 125,000 30,000 60,000 20,000 15,000 The company currently absorbs its overheads as a percentage of the total cost of direct labour and their standard profit margin is 60% of total cost. As part of their investigation into ABC, they wish to compare the two costing methods on a quote for a new road that they have tendered for, called the A1997. The cost of direct labour to be used on this job is £600,000. Their accountants have broken down the overheads into the following annual analysis for the company: Activity Specialist equipment hire Employment of agency labour Personal and employers liability insurance costs Administrative support External surveyor advice Cost driver % of Annual use overheads of cost drivers Number of days hire 45% 8,000 days Hourly rate 25% 20,000 hours No of employees 15% 300 employees Hourly rate 10% 5,000 hours Number of reports 5% 1,000 reports The new road will cause the following activities to happen: Activity Specialist equipment hire Employment of agency labour Personal and employers liability insurance costs Administrative support External surveyor advice Cost driver Hourly rate Number of days hire No of employees Use of cost drivers Hourly rate Number of reports 50 days 750 hours 20 employees 125 hours 6 reports
Jack and Larry Ltd is a road construction company in the UK which currently uses absorption costing for pricing its contracts. Their new accountants have recommended to the board that the business should experiment with an Activity Based Costing system, as it provides more accurate costing and pricing information. Whilst the manufacture of roads is very labour intensive, a large amount of machinery and equipment is used which incurs considerable overheads. The current annual budget for the company is as follows: Sales revenue Direct materials Direct labour Overhead costs Operating income £000s 125,000 30,000 60,000 20,000 15,000 The company currently absorbs its overheads as a percentage of the total cost of direct labour and their standard profit margin is 60% of total cost. As part of their investigation into ABC, they wish to compare the two costing methods on a quote for a new road that they have tendered for, called the A1997. The cost of direct labour to be used on this job is £600,000. Their accountants have broken down the overheads into the following annual analysis for the company: Activity Specialist equipment hire Employment of agency labour Personal and employers liability insurance costs Administrative support External surveyor advice Cost driver % of Annual use overheads of cost drivers Number of days hire 45% 8,000 days Hourly rate 25% 20,000 hours No of employees 15% 300 employees Hourly rate 10% 5,000 hours Number of reports 5% 1,000 reports The new road will cause the following activities to happen: Activity Specialist equipment hire Employment of agency labour Personal and employers liability insurance costs Administrative support External surveyor advice Cost driver Hourly rate Number of days hire No of employees Use of cost drivers Hourly rate Number of reports 50 days 750 hours 20 employees 125 hours 6 reports
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter4: Activity-based Costing
Section: Chapter Questions
Problem 7E: The management of Nova Industries Inc. manufactures gasoline and diesel engines through two...
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Question
Calculate the full cost and selling price for the A1997 road: using:
a) The Absorption Costing method
B) The Activity Based Costing (ABC) method
Thank you
Transcribed Image Text:Jack and Larry Ltd is a road construction company in the UK which currently uses
absorption costing for pricing its contracts. Their new accountants have recommended
to the board that the business should experiment with an Activity Based Costing system,
as it provides more accurate costing and pricing information.
Whilst the manufacture of roads is very labour intensive, a large amount of machinery
and equipment is used which incurs considerable overheads.
The current annual budget for the company is as follows:
Sales revenue
Direct materials
Direct labour
Overhead costs
Operating income
£000s
125,000
30,000
60,000
20,000
15,000
The company currently absorbs its overheads as a percentage of the total cost of direct
labour and their standard profit margin is 60% of total cost.
As part of their investigation into ABC, they wish to compare the two costing methods on
a quote for a new road that they have tendered for, called the A1997. The cost of direct
labour to be used on this job is £600,000.
Their accountants have broken down the overheads into the following annual analysis
for the company:
Activity
Specialist equipment hire
Employment of agency labour
Personal and employers liability
insurance costs
Administrative support
External surveyor advice
Cost driver
% of
Annual use
overheads
of cost drivers
Number of days hire 45%
8,000 days
Hourly rate
25%
20,000 hours
No of employees
15%
300 employees
Hourly rate
10%
5,000 hours
Number of reports
5%
1,000 reports
The new road will cause the following activities to happen:
Activity
Specialist equipment hire
Employment of agency labour
Personal and employers liability
insurance costs
Administrative support
External surveyor advice
Cost driver
Hourly rate
Number of days hire
No of employees
Use of cost drivers
Hourly rate
Number of reports
50 days
750 hours
20 employees
125 hours
6 reports
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