A company manufactures luxury watches made with high-end design materials. 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 Activity-based Costing (ABC) system to keep control over costs and offer more competitive pricing. After reviewing 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: 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 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 The company pays £8 per direct labour hour The following table lists 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 Calculate the manufacturing overhead absorption rate using the traditional absorption costing system. 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
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
A company manufactures luxury watches made with high-end design materials.
The company uses a traditional costing system in assigning
- 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 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 |
- The company pays £8 per direct labour hour
- The following table lists 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 |
- Calculate the manufacturing overhead absorption rate using the traditional absorption costing system.
- 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 |
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