Task Solutions: Accounting and Information System ACT611 essay.

Answer:

i) The activity rates for each activity using activity cost pool are computed below.

Activity rate for processing = $3000/(5600+4400) = $0.3 per MH

Activity rate for setting up = $9,800/(700+300) = $9.8 per batch

ii) Amount of overhead costs assigned to Product A1 = 5,600*$0.3 + 700*$9.8 = $8,540

Amount of overhead costs assigned to Product A6 = 4,400*$0.3 + 300*$9.8 = $4,260

iii) The product margin for Product A1 based on activity costing is computed as follows.

Sales = $45,300

(-) Direct materials (total) = ($19,600)

(-) Direct Labour (total) = ($15,900)

(-) Overhead costs = ($8,540)

Product margin = $1,260

The product margin for Project A6 based on activity costing is computed as follows.

Sales = $48,400

(-) Direct materials (total) = ($16,900)

(-) Direct Labour (total) = ($24,200)

(-) Overhead costs = ($4,260)

Product margin = $3,040

iv) The product margin for Product A1 based on traditional costing is computed as follows.

Sales = $45,300

(-) Direct materials (total) = ($19,600)

(-) Direct Labour (total) = ($15,900)

(-) Overhead costs = ($3,000 + $9,800)*(5600/10000) = ($7,168)

Product margin = $2,632

The product margin for Project A6 based on traditional costing is computed as follows.

Sales = $48,400

(-) Direct materials (total) = ($16,900)

(-) Direct Labour (total) = ($24,200)

(-) Overhead costs = ($3,000 + $9,800)*(4400/10000) = ($5,632)

Product margin = $1,668

v) Based on the computations

The product margin in part iii and partiv, it is evident that activity based costing product margins are more accurate than the traditional costing system. Also, the decision making by the management would be more superior using the activity based costing. This is because as per the traditional costing product A1 has a higher margin while the activity costing clearly highlights that product A6 enjoys a higher margin. Therefore, decisions based on traditional costing could lead to adverse impact on the profitability of the operations.

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