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ACC2350- Managerial Accounting For Activity Based Costing

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Question 1 
 
Hummer Inc. uses manufacturing cells to produce its products. A manufacturing cell is a manufacturing unit dedicated to the production of subassemblies or products. One manufacturing cell produces small motors for lawn mowers. Suppose that the motor manufacturing cell is the cost object. Assume that all or a portion of the following costs must be assigned to the cell.
a. Salary of cell supervisor
b. Power to heat and cool the plant in which the cell is located
c. Materials used to produce the motors
d. Maintenance for the cell’s equipment (provided by the maintenance department)
e. Labour used to produce the motors
f. Depreciation on the plant
g. Deprecation on equipment used to produce the motors
h. Ordering costs incurred by the Purchasing department for ordering raw materials for all of Hummer’s products
 
Required:
 
1. i. Identify which cost assignment method would most likely be used to assign the cost of each activity to the motor manufacturing cell: direct tracing, driver tracing or
allocation.
ii. When driver tracing is selected, identify a potential driver that could be used for cost tracing. State your assumptions where appropriate.

2. Explain the difference between direct tracing and driver tracing.

Question 2 
 
Azura Company had the following inventory balances at the beginning and end of November:
1 November 30 November
Raw Materials $17,000 $20,000
Finished Goods $50,000 $44,000
Work in Process $ 9,000 $11,000
Additional information:
• During November, $39,000 in raw materials (all direct materials) were drawn from inventory and used in production.
• The company's predetermined overhead rate was $8 per direct labour-hour, and it paid its direct labour workers $10 per hour.
• Azura incurred $28,000 of actual manufacturing overhead cost during the month and allocated (applied) $26,400 in manufacturing overhead cost.
 
Required:
 
1. Calculate the cost of raw materials purchased during November.
2. A total of 300 hours of direct labour time had been expended on the jobs in the beginning Work in Process inventory. Calculate the direct materials cost in the beginning Work in Process inventory.

3. Calculate the actual direct labour hours worked during November.

4. The ending Work in Process inventory contained $4,700 of direct materials cost. Calculate the amount of direct labour cost in the ending Work in Process inventory.

5. Calculate the cost of goods manufactured in November.
 
6. a. Calculate the amount of manufacturing overheads under or over allocated (applied), stating clearly whether the amount is under or over allocated
b. Prepare the journal entries to adjust for the overheads under or over allocated.
explanation is required.
 
Question 3 Required:
1. Give one (1) example of process costing in each of a) service industries and b) manufacturing industries.

2. How would process costing for services differ in terms of Work-in Progress from process costing for manufactured goods?

Question 4 
Minlab Ltd tests the mineral content in ore and soil samples for mining companies. It  Processing time in hours
200 70 385 315
Machine hours 40 0 530 470
Required:
a. Calculate the total costs of all departments using the direct method after allocation of support department costs

b. Calculate the usage ratios using the step-down (sequential) method.

Question 5
Café Laguna operates at Mindarie Keys. The owner is looking toward improving its inventory practices, as the current inventory costs on bottled drinks are $3,000 per year.
 
The following table summarises details about this inventory item. Annual demand 40,000 bottles Delivery time 5 days from date order is placed
Ordering costs per order $100
Carrying costs per bottle per year $0.50
The café is opened 7 days a week over 50 weeks in a year.
Required:
1. Compute the economic order quantity (EOQ) that will minimise inventory costs.
2. Compute the annual inventory costs savings assuming that the quantity ordered per order is equal to the EOQ calculated in part 1.

3. There is a projected increase in visitors to Mindarie Keys, which will increase the demand for bottled drinks to 150 bottles per day. Calculate the new reorder point assuming safety stock is to be held. (Round answers to nearest unit)
 
 

Answer:

Part 1:

The best method for the stated purposes would be the Activity Based Costing technique.

For direct tracing, the traditional method costing could be used whereas for driver tracing, activity based costing technique could be used

Part 2:

  1. Salary of cell supervisor-the number of hours spent on each product could be used
  2. Power to heat and cool the plant in which the cell is located-the number of unit consumed in the electricity could be used
  3. Materials used to produce the motors-the direct materials consumed could be used
  4. Maintenance for the cell’s equipment (provided by the maintenance department)-the direct costs incurred could be used
  5. Labour used to produce the motors-the direct labour hours spent could be used
  6. Depreciation on the plant- the number of units manufactured from that plant could be used
  7. Deprecation on equipment used to produce the motors- the number of units manufactured from that equipment could be used
  8. Ordering costs incurred by the Purchasing department for ordering raw materials for all of Hummer’s products- the number of orders made from each department could be used 
 

Answer 2:

1

Cost of Raw materials purchased during November

 

Closing Inventory

as on 30 Nov

$20,000.00

 

Less: Opening Inventory

as on 1 Nov

$17,000.00

 

Increase in Inventory

during Nov

$3,000.00

 

Add: Raw materials drawn during production

$39,000.00

 

Raw materials purchased

 

$42,000.00

 

2

A total of 300 hours of direct labour time had been expended on the jobs in the beginning Work in Process inventory. Calculate the direct materials cost in the beginning Work in Process inventory.

 

Work in Process

as on 1 Nov

$9,000.00

 

 

 

 

 

Less: Direct Labour Cost

 

 

 

 

 

 

 

(300 hours)

$10 per hour

$3,000.00

 

 

 

 

 

Less: Overhead

 

 

 

 

 

 

 

(300 hours)

$8 per hour

$2,400.00

 

 

 

 

 

 

 

 

 

 

 

 

 

Raw materials in Work in Process

$3,600.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

Calculate the actual direct labour hours worked during November

 

 

 

 

 

 

 

 

 

 

 

 

Allocated Overheads

during Nov

$26,400.00

a

 

 

 

 

Predetermined Overhead Rate

per Direct Labour hour

$8.00

b

 

 

 

 

 

 

 

 

 

 

 

 

No. of direct labour hours worked

3300

a/b

 

 

 

 

 

 

 

 

 

 

 

4

The ending Work in Process inventory contained $4,700 of direct materials cost. Calculate the amount of direct labour cost in the ending Work in Process inventory

 

Work in Process

as on 30 Nov

$11,000.00

 

 

 

 

 

Less: Direct Materials

 

$4,700.00

 

 

 

 

 

Cost of Direct Labour and Overheads in Work in Process

$6,300.00

a

 

 

 

 

 

 

 

 

 

 

 

 

Direct Labour Hour Rate

per Direct Labour hour

$10.00

 

 

 

 

 

Predetermined Overhead Rate

per Direct Labour hour

$8.00

 

 

 

 

 

Total Labour & Overhead Rate

per Direct Labour hour

$18.00

b

 

 

 

 

 

 

 

 

 

 

 

 

No. of Direct Labour Hours

 

350

c = a/b

 

 

 

 

Hourly Rate

 

$8.00

d

 

 

 

 

Direct Labour Cost

 

$2,800.00

c*d

 

 

 

 

 

 

 

 

 

 

 

5

Calculate the cost of goods manufactured in November

 

 

 

 

 

 

 

 

 

 

 

 

 

Process Account

 

Description

Amount in $

 

Description

Amount in $

 

To Opening Work in Process

 

 

 

By Finished Goods Account

 

 

 

 - Raw Materials

3600

 

 

 - Raw Materials

37900

 

 

 - Direct Labour

3000

 

 

 - Direct Labour

32500

 

 

 - Overheads

2400

9000

 

 - Overheads

26000

96400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

To Raw Materials drawn in production

 

39000

 

 

 

 

 

(given in question)

 

 

 

 

 

 

 

To Direct Labour

 

33000

 

By Closing Work in Process

 

 

 

(3300 hours as calculated in Q3 @ $10 per hour)

 

 

 

 - Raw Materials

4700

 

 

To Overheads

 

26400

 

 - Direct Labour

3500

 

 

(3300 hours as calculated in Q3 @ $8 per hour)

 

 

 

 - Overheads

2800

11000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

107400

 

 

 

107400

 

 

 

 

 

 

 

 

 

Cost of Good Manufactured during November $96,400

 

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

 

a

Calculate the amount of manufacturing overheads under or over allocated (applied), stating clearly whether the amount is under or over allocated

 

 

 

 

 

 

 

 

 

Overhead Applied in November

$26,400.00

 

 

 

 

 

 

Overhead Incurred in November

$28,000.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Under applied / allocated Overheads

$1,600.00

 

 

 

 

 

 

 

 

 

 

 

 

 

b

Prepare the journal entries to adjust for the overheads under or over allocated. No explanation is required.

 

 

Manufacturing Overhead Control A/c

$1,600.00

 

 

 

 

 

 

 To Costing Profit & Loss A/c

 

$1,600.00

 

 

 

 

 

 

 

 

 

 

 

 

Answer 3:

Part 1:

Process costing is used in automobiles, food industries

And it is used in petroleum, coal mining industries.

Part 2:

For the service industries, job costing is sued. From the purposes of accounting, the process costing differs from the job costing. The job costing tracks in all the costs along with the profits for each and every job and this helps in accounting of all the expenses for each job for the taxation purposes and also for analysis.

On the other hand, the process of process costing helps in tracking of all the costs that are associated with the manufacturing of the products. For example, a company manufactures the plastic combs, now the plastics is put in the mild in the molding department and then the same is painted before the same is packed. As these combs move from one department to another, more costs are added to production (Lumen learning, 2018).

Answer 4:

Part a:

 

 

 

 

 

Particulars

Production Departments

 

 

MA

SA

 

 

 

 

 

Direct overhead costs

        9,00,000.00

   8,00,000.00

 

 

 

 

 

Computing department allocation

        1,10,000.00

      90,000.00

 

200000 would be divided into 385:315

 

 

 

 

 

 

 

Engineering department allocation

        2,12,000.00

   1,88,000.00

 

400000 would be divided into 530:470

 

 

 

 

 

 

 

Total costs

      12,22,000.00

 10,78,000.00

 

 

 

 

 

 

Part b:

 

 

 

 

 

Particulars

Service departments

Production Departments

 

Computing

Engineering

MA

SA

 

 

 

 

 

Direct overhead costs

 

 

    9,00,000.00

        8,00,000.00

 

 

 

 

 

Computing department allocation

            -2,00,000.00

18181.81818

    1,00,000.00

           81,818.18

200000 would be divided into 70:385:315

 

400000

 

 

 

 

418181.8182

100000

81818.18182

Engineering department allocation

 

 

    2,21,635.93

        1,96,545.07

418181 would be divided into 530:470

 

 

 

 

 

 

 

 

 

Total costs

 

 

    3,21,635.93

        2,78,363.25

 

 

 

 

 

 

Answer 5:

Part 1:

 

Annual demand

        40,000.00

 

 

Delivery time

                 5.00

 

 

Ordering costs per order

             100.00

 

 

Carrying costs per bottle per year

                 0.50

 

 

 

 

 

 

 

 

 

 

EOQ

Sq root of (2*Ordering costs per order*Demand/Holding costs)

 

 

 

 

 

 

 

 

 

 

 

 160,00,000.00

 

 

 

 

 

 

EOQ

          4,000.00

 

 

 

 

 

 

 

Part 2:

 

 

 

Inventory costs when 4000 bottles are ordered

 2,000.00

 

costs before

 3,000.00

 

 

 

 

Cost savings

 1,000.00

 

 

Part 3:

Annual demand

52500

 

Delivery time

5

 

Ordering costs per order

100

 

Carrying costs per bottle per year

0.5

 

 

 

 

 

 

 

EOQ

Sq root of (2*Ordering costs per order*Demand/Holding costs)

 

 

 

 

 

 

 

 

 210,00,000.00

 

 

 

 

EOQ

4852.57

 

 

 

 

 

 

References:

3.1 Process Costing Vs. Job Order Costing | Managerial Accounting. (2018). Retrieved from https://courses.lumenlearning.com/tcc-managacct/chapter/chapter-1/

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