Unit Learning Outcomes assessed:
- ULO3: Prepare and explain alternate product costing.
- ULO6: Demonstrate a student-oriented approach to learning.
Deakin Graduate Learning Outcomes assessed:
- GLO2: Communication.
- GLO5: Problem-solving.
Queries: Please peruse the discussion forum as you may find the information you are looking for. If you are unable to find the information regarding the individual assignment you are looking for, please contact the teaching team preferably using the discussion forum on CloudDeakin or via email.
Considering four cost pool activities (operating the BBQ, inflating balloons, cashier, and greeting customers) prepare a table with labour cost per friend and total labour costs (use Exhibit 7-6 as a model).
Calculate the activity rate for each of the labour cost pool activities (use Exhibit 7-7 as a model).
Which of the four cost pool activities is most expensive and why?
Prepare an activity-based costing product margin for the sales of barbecues and balloons (use Exhibit 7-11 as a model). For the sake of simplicity, consider the manufacturing overhead and sales and administrative tasks as untraceable expenses and do not include them.
After reviewing the activity-based costing product margin the four friend have decided to allocate the manufacturing overhead and the sales and administrative expenses. For allocating the manufacturing overhead the whole expense leasing the BBQ was allocated to the sales of barbecues whereas the whole expense with leasing the balloon pump was allocated to the sales of balloons. For the expenses for leasing the gazebo and getting the permit, the amount was split evenly between the two products.
Prepare an activity-based costing product margin for the sales of barbecues (use Exhibit 7-11 as a model) including the allocated manufacturing overhead and sales and administrative tasks.
Unit Learning Outcomes assessed
Question 1
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Income Statement
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Sales Revenue
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$ 5,000.00
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Direct Material
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$ 450.00
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Direct Labour
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$ 1,600.00
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Production Overhead
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$ 250.00
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Gross Profit
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$ 2,700.00
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Less: Operating Expenses
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Leasing
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$ 50.00
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Permit and License
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$ 250.00
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Net Income
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$ 2,400.00
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Question 2
Part 2.1: Labour cost per friend and total labour costs
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Labour Cost
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Operating BBQ
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Inflating Balloons
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Cashier
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Greeting Customers
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John
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$ 400.00
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$ 280.00
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$ -
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$ 80.00
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$ 40.00
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Paul
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$ 400.00
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$ -
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$ 280.00
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$ 80.00
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$ 40.00
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Ringo
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$ 400.00
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$ 40.00
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$ 120.00
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$ 200.00
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$ 40.00
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George
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$ 400.00
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$ -
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$ 80.00
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$ 40.00
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$ 280.00
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Total Activity Cost
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$ 1,600.00
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$ 320.00
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$ 480.00
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$ 400.00
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$ 400.00
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Part 2.2: Determination of Activity Rate
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Activity
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Cost Pool
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Cost Driver
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Quantity
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Activity Rate
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Operating BBQ
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$ 320.00
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Number of BBQ
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2000
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$0.16
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Inflating Balloons
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$ 480.00
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Number of Balloons
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1000
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$0.48
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Cashier
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$ 400.00
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Total Number of units sold
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3000
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$0.13
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Greeting Customers
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$ 400.00
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Total Number of units sold
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3000
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$0.13
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Part 2.3: Most expensive activity
Inflating the balloons has the highest total cost and cost per unit because John, Paul and George are involved in these activities and are cumulatively devoting more than other activities. Also, there are only 1000 balloons to be sold in market so high cost allocation has been done to identify per unit cost.
Part 2.4: Determination of Profit Margin
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Sales
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$ 4,000.00
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$ 1,000.00
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Costs
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Direct Material
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$ 400.00
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$ 50.00
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Direct Labour:
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Operating BBQ
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$ 320.00
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$ -
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Inflating Balloons
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$ -
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$ 480.00
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Cashier
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$ 266.67
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$ 133.33
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Greeting Customers
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$ 266.67
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$ 133.33
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Total Cost
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$ 1,253.33
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$ 796.67
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Profit Margin
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$ 2,746.67
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$ 203.33
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Question 3
Part 3.1
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BBQ
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Sales
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$ 4,000.00
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Costs
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Direct Material
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$ 400.00
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Direct Labour
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Operating BBQ
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$ 320.00
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Inflating Balloons
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$ -
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Cashier
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$ 266.67
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Greeting Customers
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$ 266.67
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Production Overhead
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$ 200.00
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Selling and Administrative
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$ 150.00
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Total Cost
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$ 1,603.33
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Profit Margin
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$ 2,396.67
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Profit per unit
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$ 1.20
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Balloons
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Sales
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$ 1,000.00
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Costs
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Direct Material
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$ 50.00
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Direct Labour
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Operating BBQ
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$ -
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Inflating Balloons
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$ 480.00
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Cashier
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$ 133.33
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Greeting Customers
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$ 133.33
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Production Overhead
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$ 50.00
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Selling and Administrative
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$ 150.00
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Total Cost
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$ 996.67
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Profit Margin
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$ 3.33
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Profit per unit
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$ 0.003
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Question 4
Part 4:1
This report presents the case of a firm selling BBQ and Balloons at a stand put outside the shopping centre. In the firm, there are four members: John, Paul, Ringo, and George. Among them, John spends 70% of his total working hours in preparing barbeques and Paul spends 70% of his total working hours in the inflation of balloons. Rest two other members were busy in selling and administrative activities. Ringo spends 50% of his time in cash collecting activities and George spends 70% of his time on attending the customers. Presently, all of the members of the firm are getting equal pays at the rate of $ 400 per member. The argument of Paul to split the firm’s income among him and John because of involvement of George and Ringo in the non-operating activities is not correct as income of the business is determined by deduction all the production related and other operating expenses (Hilton & Platt, 2013). Although, George and Ringo are not involved in the core activities of their business, yet they are contributing to the organisation’s earnings in an indirect way by performing the support activities. The activities performed by them are required to support the primary activities of business and hence they are entitled to the salary. However, the decision of paying equal amount to all the members must be altered and each member must be paid in accordance with the time devoted by them in each individual activity of the business whether such activity is primary or secondary (Zimmerman & Yahya-Zadeh, 2011). The pay per activity must be based on the purpose and complexity involved in the activities performed by the members.
Part 4.2
The statement of Ringo that the selling of Balloon is a bad idea is correct. This can be justified by applying the activity based costing technique for the allocation of different costs to two different BBQ and balloons. Under ABC approach, the cost to each product is allocated on the basis of actual quantum of activities involved in producing and selling these products separately (Garrison et.al., 2010). The allocation of common cost is done on the reasonable basis so as to determine the actual cost involved in their individual production (Homburg, 2004). In the present case, ABC is applied and it has been found that the balloon product is generating the total profit of only $ 3.3 in total but the total net margin of BBQ is $ 2396.67 which is quite higher than that of balloons. If profit per unit is considered, the sale BBQ is offering profit margin of 1.20 units and the sale of balloons is generating no or negligible profit per unit and continuing its production is not a good idea for the firm. It must rather save its resources used in balloon units and consume them for the BBQ units as it will lead to higher profitability of the firm.
References:
Garrison, R.H., Noreen, E.W., Brewer, P.C. and McGowan, A. (2010). Managerial accounting. Issues in Accounting Education, 25(4), pp.792-793.
Hilton, R.W. and Platt, D.E. (2013). Managerial accounting: creating value in a dynamic business environment. McGraw-Hill Education.
Homburg, C. (2004). Improving activity-based costing heuristics by higher-level cost drivers. European Journal of Operational Research, 157(2), 332-343.
Zimmerman, J. L., & Yahya-Zadeh, M. (2011). Accounting for decision making and control. Issues in Accounting Education, 26(1), 258-259.
