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Activity Based Costing and Budgeting Questions and Solutions

Peppa Company produces two products, X and Y, both made from the same material. Until now, it has used traditional absorption costing to allocate overheads to its products. The company is now considering an activity based costing system. Information for the two products for the last year is as follows:

 X Y Production and sales volumes (units) 30,000 50,000 Selling price per unit €20 €30 Raw material usage (kg) per unit 4 6 Direct labour hours per unit 0·6 0·44 Machine hours per unit 1.0 1.4 Number of production set ups per annum 24 36 Number of purchase orders per annum 46 54 Number of deliveries to retailers per annum 20 25

The price for raw materials remained constant throughout the year at €2 per kg. Similarly, the direct labour cost for the whole workforce was €15 per hour. The annual overhead costs were as follows:

Cost Pool                                       Driver                                           €

Machine set up costs               Number of Production Set Ups     30,000

Machine running costs            Machine Hours                               40,000

Ordering costs                         Number of purchase Orders          45,000

Delivery costs                          Number of Deliveries                      45,000

1. Calculate the full cost and profit per unit for products X and Y under traditional absorption costing, using direct labour hours as the basis for absorpt (15 Marks)
2. Calculatethe full cost and profit per unit for each product using activity based costin (25 Marks)
3. Explain the reason for the difference in profit using traditional costing in (a) and Activity Based costing in (b) (10 Marks)

(Total 50 Marks)

Carley budgets to sell 1 product, Gamma, and has provided you with the following selling prices and  variable costs:

 Product Sales Units Selling Price per unit € Variable Cost per unit € Gamma 1,000,000 6 3

Annual fixed costs are budgeted at €1,5000,000.

1. Calculate the total budgeted prof (8 Marks)
2. Calculate the contribution / sales ratio for Gamma   (3 Marks)
3. Calculate the breakeven sales volume and sales revenue (4 Marks)
4. Howmany units of Gamma would Canning Ltd need to sell to earn a total profit of €6,000,000?  (5 Marks)
5. Managementare deciding whether or not to spend an extra €400,000 on advertising and sales promotion of Product Gamma. It is considering reducing its selling price to €5 per unit, resulting in expected sales of 1,250, 000 unit Advise whether or not it is financially worthwhile increasing fixed costs by spending €400,000 on the advertising and sales promotion. (10 Marks)

(Total 30 Marks)

‘The budgeting process is an important feature of effective management performance’.

1. Outlineand briefly explain five benefits of budgeting (10 Marks)
2. Outlineand briefly explain five limitations  of budgeting (10 Marks)

(Total 20 Marks)