ManagerialAccountAH tcm4-322498

NATIONAL QUALIFICATIONS CURRICULUM SUPPORT
Accounting
Managerial Accounting
[ADVANCED HIGHER]
Lindsay Mitchell
The Scottish Qualifications Authority regularly reviews the arrangements for National Qualifications. Users of all NQ support materials, whether published by LT Scotland or others, are reminded that it is their responsibility to check that the support materials correspond to the requirements of the current arrangements.
Acknowledgement Learning and Teaching Scotland gratefully acknowledge this contribution to the National Qualifications support programme for Accounting. First published 2005 Learning and Teaching Scotland 2005 This resource may be reproduced in whole or in part for educational purposes by educational establishments in Scotland provided that no profit accrues at any stage.
MANAGERIAL ACCOUNTING (AH)
Learning and Teaching Scotland 2005
Contents
Introduction Section 1: Section 2: Section 3: Activity-Based Costing (ABC) Multi-Product Break-Even Analysis Contract Costing Statements 4 5 30 46
MANAGERIAL ACCOUNTING (AH) Learning and Teaching Scotland 2005
INTRODUCTION
Introduction
This pack contains notes and exercises for three topics activity-based costing, multi-product break-even analysis and contract costing. Activity-based costing and multi-product break-even analysis are both new topics for Advanced Higher and it is intended that the enclosed material will provide guidance to tutors as to what students are expected to know when covering the topics. Contract costing appeared in the old Higher Accounting and Finance arrangements but is now included in the Advanced Higher content. As no previous material on this topic has been produced it is hoped that this package will fill the gap. Each topic contains notes, exercises and full solutions.
ACTIVITY-BASED COSTING (ABC)
Section 1
Activity-Based Costing (ABC)
In your studies in Higher Accounting one of the major topics in the Cost/Management Accounting part of the syllabus was the treatment of overhead costs within a business. This involved the allocation and apportionment of overheads among cost centres and the subsequent absorption of these cost-centre overheads into the cost units produced in the cost centres. The whole process described above can best be illustrated by the following diagram.
Overhead Costs
Allocation
Apportionment using selected basis
Single Cost Centre
Multiple Cost Centres
Production Cost Centres
Service Cost Centres
Re-apportionment using selected basis Cost Units using appropriate absorption rate
The above approach is sometimes referred to as the traditional approach to overhead absorption. Activity-based costing has been developed within the last 2030 years in an effort to avoid defects in the traditional system.
The main characteristics of the traditional system are as follows: it was developed in manufacturing industry there were typically a narrow range of products production processes were much simpler than now direct material and labour costs were the main production costs overhead costs were relatively small inaccuracies due to arbitrary nature of process were therefore relatively unimportant. Activity-Based Costing (ABC) has therefore emerged due to the following: product ranges have increased overhead costs have become more significant manufacturing concerns no longer dominate service organisations account for a much larger share of economic activity production is more complex and capital intensive. The main ideas behind ABC are: costs are caused by activities for example ordering, material handling, scheduling, machining, assembling, etc. production of products or supply of services creates the demand for these activities costs are therefore assigned to products or services on the basis of consumption of these activities.
Therefore ABC involves a number of stages. 1. 2. Identify the major activities of the organisation. Identify the factors which affect the cost of an activity. These factors are known as COST DRIVERS e.g. the number of purchase orders might be considered as the cost driver for the costs of a purchasing department. Collect the associated costs of each activity. This is known as the COST POOL. Allocate costs to products/services based on the demand created for the cost drivers.
3.
4.
As with the traditional approach, ABC can be illustrated by a diagram:
Identify major activities
Create cost pool for each activity
Identify cost driver for each activity
Produce absorption rate for each pool based on cost driver
Overhead cost per unit
Let us now look at an example which will show both the traditional approach to the treatment of overheads and then how ABC would treat the same situation.
Example
Deeside plc manufactures three products, A, B and C in their factory and uses a factory-wide absorption rate for absorbing overheads based on direct labour hours. The following information relates to Period 5 of Year 3. Product Production (units) Direct Material Cost p.u. Direct Labour Hours p.u. A 12,000 40 4 B 8,000 30 6 C 4,000 20 2
Direct labour is paid at 8 per hour. The overhead costs for Period 5 are as follows: 312,000 56,000 80,000 128,000 100,000 676,000
Machining Set-up Assembling Goods Receiving Dispatch
(a) (b)
Calculate the factory-wide absorption rate for Period 5. Calculate the cost p.u. of each product under the traditional approach to treatment of overheads.
The company is considering using ABC as a method of arriving at the cost per unit of their products and the following information is available for this purpose: The overheads have been investigated and while machining costs will be absorbed on the basis of machine hours, cost drivers have been identified for the other overheads. Overhead Set-up Assembling Goods Receiving Dispatch Cost Driver No. of production runs No. of production orders No. of receipts No. of production orders
The following additional information is also available: Product Machine hours per unit No. of Production runs No. of Material receipts No. of Production orders (c) (d) A 2 1 3 3 B 3 2 5 2 C 1 5 24 5
Calculate a cost driver absorption rate for each of the above overheads. Calculate the cost per unit for each product under the ABC system.
This question contains a lot of information and lots of figures and therefore it is important to read it carefully with a view to deciding which information relates to each part of the question. The purpose of this question is to show how the traditional method of overhead absorption works and then to demonstrate the Activity-Based Costing approach. At the end of the question we will compare the two methods and see if we can explain the differing results they produce.
Solution
(a) This opening part of the question asks us to calculate a factory-wide overhead absorption rate (sometimes called a blanket rate), based on labour hours.
You should recall that the calculation of an overhead absorption rate divides the relevant overhead (which may be for a cost centre or, as in this case, for the whole factory) by the relevant units of the base selected. (There were actually six possibilities, i.e. per unit, % on material, % on wages, % on prime cost, per labour hour or per machine hour). In this question we are using labour hours and therefore the calculation is as follows: Overhead Absorption Rate = Factory Overheads Labour Hours
Although we know the total factory overheads we need to calculate the total labour hours, i.e. A 12,000 4 B 8,000 6 C 4,000 2 = 48,000 = 48,000 = 8,000 104,000
We can now calculate the factory-wide rate = 676,000 104,000
= 6.50 per labour hour
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(b)
In this next part we are asked to calculate the total cost per unit for each product using the traditional approach.
This total cost will be the sum of the two direct costs material and labour, plus overheads. The question gives us the material cost p.u. for each product, but we will have to calculate the figures for labour and overheads. For labour this will be the number of labour hours per unit multiplied by the labour rate per hour. For overheads it will be the number of labour hours per unit multiplied by the overhead absorption rate calculated in part (a), i.e. Cost per unit Material Labour Overheads A 40 32 (4 8) 26 (4 6.50) 98 B 30 48 (6 x 8) 39 (6 x 6.50) 117 C 20 16 (2 8) 13 (2 6.50) 49
The remaining parts of the question now introduce the Activity-Based Costing technique. (c) This part asks us to calculate cost driver absorption rates for the separate overheads.
The total overhead of the factory has been broken down into five activities. For the first of these, machining, a traditional-style absorption rate is to be used, i.e. machine hour rate. Machine Hour Rate = Machine Overhead Machine Hours
Once again we know the overhead but need to calculate the machine hours, i.e. A 12,000 2 B 8,000 3 C 4,000 1 = 24,000 = 24,000 = 4,000 52,000
Therefore the calculation is Machine Hour Rate = 312,000 52,000 = 6 per m/c hour
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For the other activities, which comprise the factory overheads, appropriate cost drivers have been identified and we can use these to calculate the relevant absorption rate. The cost drivers identified are the number of production runs, the number of production orders and the number of receipts. Therefore before we go any further we must calculate the relevant figure for each driver. Production Runs A B C 1 2 5 8 3 2 5 10 3 5 24 32
Production Orders
A B C
Receipts
A B C
Now we can calculate the absorption rate for each activity, based on the relevant cost driver.
Set-up Assembling Goods Receiving Dispatch
56,000 8 80,000 10 128,000 32 100,000 10
= 7,000 per run = 8,000 per order = 4,000 per receipt = 10,000 per order
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(d)
The final part requires us to use these figures to produce a cost per unit for each product. Therefore we need to calculate the overhead cost per unit to add to the material and labour costs which we calculated in part (b).
Machinery overhead is the simplest, i.e. machine hours per unit multiplied by machine hour rate. A B C 2 6 = 12 3 6 = 18 1 6 = 6
For the other overhead activities we need to relate the cost driver absorption rate to the units produced.
A 7,000 12,000 = 0.58 24,000 (8,000 3 ) 12,000 =2 12,000 (4,000 3 ) 12,000 =1 B 14,000 (7,000 2 ) 8,000 = 1.75 16,000 (8,000 2 ) 8,000 = 2 20,000 (4,000 5 ) 8,000 = 2.50 C 35,000 (7,000 5 ) 4,000 = 8.75 40,000 (8,000 5 ) 4,000 =10 96,000 (4,000 2 4) 4,000 = 24
Set-up
Assembling
Goods Receiving
Dispatch
30,000 (10,000 3 ) 20,000 (10,000 2 ) 50,000 (10,000 5 ) 12,000 8,000 4,000 = 2.50 = 2.50 = 12.50
Therefore using ABC total cost per unit for the products would be as follows: A 40 32 12 0.58 2 1 2.50 90.08 B 30 48 18 1.75 2 2.50 2.50 104.75 C 20 16 6 8.75 10 24 12.50 97.25
Direct Materials Direct Labour Machinery Set-up Assembling Goods Receiving Dispatch
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Contrast these figures with the ones produced in the answer to part (b) of the question. The most striking change is in the increase in the cost per unit of Product C, although there is also a less substantial decrease in the cost per unit of the other two products. The increase in the cost of C has arisen because most of the charges relating to C were not identified under the traditional absorption system. The cost drivers identified in the ABC system are responsible for generating these charges and thus we can suggest that the ABC system produces a more accurate cost for each product. The following examples will provide practice in applying the ABC system. Solutions are provided at the end of this section.
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Question 1
Your company currently produces and sells 4 products, Alpha, Beta, Gamma and Delta. The following information relates to Period 3. Alpha 180 46 21 4 6 30 18 Beta 150 58 14 3 5 30 15 Gamma 120 35 7 2 4 30 12 Delta 180 70 14 3 6 30 18
Production (units) Costs per unit: Direct material Direct labour Machine hours per unit Number of production runs Number of requisitions raised Number of orders completed
Currently the production overhead is absorbed by the machine-hour rate method and the following are the total production overhead costs for Period 3. 24,540 6,300 7,200 3,150 7,560 48,750
Machine Department Set-up costs Receiving costs Inspection costs Despatch costs
Cost drivers have been identified as follows: Set-up costs Stores receiving Inspection Despatch Number Number Number Number of of of of production runs requisitions raised production runs orders completed
You are required to calculate: (a) (i) The machine-hour rate currently used to absorb the production overhead. The total cost per unit for each product if overheads are absorbed by the method in (a)(i).
(ii)
(b)
The cost per unit for each product using an ABC approach.
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Question 2
Jomit plc has budgeted for the following overhead costs for Period 6. 31,200 39,000 27,300
Material receipt costs Power costs Material handling costs
The company produces 3 products, P, Q and R for which the following budgeted information is available for Period 6. Product Output (units) Material batches Per Unit Direct material (kg) Direct material () Direct labour (hours) Number of power operations Direct labour rate per hour P 4,000 20 Q 3,000 10 R 1,600 32
4 6 0.2 6 8
6 5 0.5 3 8
3 9 1.0 2 8
Currently the overhead costs are each absorbed using a rate per direct labour hour. However, the company is considering applying overheads using an ABC approach and has identified drivers for the activities as follows: Material receipt costs Power costs Material handling costs You are required to calculate: (a) The total cost per unit for each product using the current overhead absorption method. The total cost per unit for each product using the ABC method. number of batches of material number of power operations kg of material handled
(b)
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Question 3
Your company currently produces a range of three products, D, E and F to which the following details relate for Period 2. D 1,500 18 1 3 E 2,500 10 3 2 F 14,000 20 2 6
Production (units) Material cost per unit Labour hours per unit Machine hours per unit
Labour costs are 8 per hour and production overheads are currently absorbed in the conventional system by reference to machine hours. Total production overheads for Period 2 have been analysed as follows: 327,250 187,000 140,250 280,500 935,000
Set-up costs Handling costs Machining costs Inspection costs
(a)
Calculate the cost per unit for each product using conventional methods.
The introduction of an ABC is being considered and to that end the following volume of activities have been identified with the current output levels. D 90 16 180 E 138 28 216 F 576 116 804
Number of set-ups Number of material issues Number of inspections (b)
Calculate the cost per unit for each product using the ABC approach.
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Question 4
The following table summarises the details of the production levels, costs and cost drivers for Abtronics Ltd who have traditionally absorbed overheads into production on the basis of a labour hour absorption rate. They wish to move to an ABC system. Product Material cost per unit Labour hours per unit Machine hours per unit Number of production runs Number of production orders Number of orders delivered Number of receipts Production (units) P 20 4 4 6 45 30 12 15,000 Q 15 6 3 14 30 20 28 10,000 R 10 3 6 40 75 50 80 4,000
Labour hours are paid for at 10 per hour. Overheads Machining Set-up costs Receiving costs Packing costs Engineering costs 684,000 60,000 240,000 300,000 450,000 1,834,000 Cost Driver machine hours production runs number of receipts number of orders delivered number of production orders
(a)
Calculate the cost per unit for each product using the traditional overhead absorption approach. Calculate the cost per unit using the ABC approach.
(b)
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Question 5
Param plc has incurred the following overheads in its factory during Period 6. 90,000 135,000 105,000 120,000 150,000
Quality control Process set-ups Purchasing Order processing Occupancy costs
Param plc produces a range of products, two of which are Product X and Product Y. The following information relate to these two products. X 5 8 150 500 1,000 3 10,000 Y 8 12 210 300 800 2 6,000
Material costs per unit Labour cost per unit Number of process set-ups Number of purchase orders issued Number of customer orders Machine hours per unit Production (units)
Inspection takes place after each process set-up. The cost drivers which have been identified for the factory are: Quality control Process set-ups Purchasing Order processing Occupancy costs 450 inspections 450 set-ups 1,000 purchase orders 2,000 customer orders 75,000 machine hours
Calculate the cost per unit for Products X and Y using: (i) (ii) existing overhead absorption rate per machine hour an activity-based costing approach.
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Solutions
Question 1 (a) (i) Total machine hours: Alpha Beta Gamma Delta 4 3 2 3 1 80 1 50 1 20 1 80 = = = = = 720 450 240 540 1950
Total overheads = 48,750 Machine hour absorption rate = 48,750 1,950 = 25
(ii)
Cost per unit Direct material Direct labour Production overhead
Alpha 46 21 100 167 Driver m/c hours Runs Requisitions Runs Orders
Beta 58 14 75 147
Gamma 35 7 50 92
Delta 70 14 75 159 Cost per driver 12.58 300 60 150 120
(b)
Cost Machine Dept Set-up Receiving Inspection Despatch
24,540 6,300 7,200 3,150 7,560
Driver transactions 1950 21 120 21 63
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Overheads cost per unit Alpha Set-up 1800 = 10 180 Beta 1500 = 10 150 Gamma 1200 = 10 120 Delta 1800 = 10 180
Receiving
1800 = 10 180
1800 = 12 150
1800 = 15 120
1800 = 10 180
Inspection
900 = 5 180
750 = 5 150
600 = 5 120
900 = 5 180
Despatch
2160 = 12 180
1800 = 12 150
1440 = 12 120
2160 = 12 180
Machine Dept
4 12.58 = 50.32
3 12.58 = 37.74
2 12.58 = 25.16
3 12.58 = 37.74
Total cost per unit Materials Labour Set-up Receiving Inspection Despatch Machine Dept
Alpha 46.00 21.00 10.00 10.00 5.00 12.00 50.32 154.32
Beta 58.00 14.00 10.00 12.00 5.00 12.00 37.74 148.74
Gamma 35.00 7.00 10.00 15.00 5.00 12.00 25.16 109.16
Delta 70.00 14.00 10.00 10.00 5.00 12.00 37.74 158.74
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Question 2 (a) Direct labour hours: P 4,000 0 .2 = 800 Q 3,000 0 .5 = 1,500 R 1,600 1 .0 = 1,600 3,900
Overhead absorption rates : Material receipt 31,200 = 8 per labour hour 3,900 39,000 = 10 per labour hour 3,900 27,300 = 7 per labour hour 3,900
Power
Material handling
Overhead cost per unit Material receipt
P 8 0 .2 = 1.60 10 0 .2 = 2 7 0 .2 = 1.40
Q 8 0 .5 = 4 10 0 .5 = 5 7 0 .5 = 3.50
R 8 1 = 8 10 1 = 10 7 1 = 7
Power
Material handling
Total cost per unit Direct material Direct labour Material receipt costs Power costs Material handling
P 6.00 1.60 1.60 2.00 1.40 12.60
Q 5.00 4.00 4.00 5.00 3.50 21.50
R 9.00 8.00 8.00 10.00 7.00 42.00
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(b)
ABC absorption rates Material receipt 31,200 = 503.23 per batch 62 39,000 = 1.08 per operation 36,200 (W1) 27,300 = 0.70 per kg 38,800 (W2)
Power
Material handling
W1 (4,000 6 ) + (3,000 3 ) + (1,600 2 ) = 36,200 W2 (4,000 4 ) + (3,000 6 ) + (1,600 3 ) = 38,800 Overhead costs per unit Material receipts
P 503.23 20 4,000 = 2.52
Q 503.23 10 3,000 = 1.68 1.08 3 = 3.24 0.70 6 = 4.20 Q 5.00 4.00 1.68 3.24 4.20 18.12
R 503.23 10 1,600 = 10.06 1.08 2 = 2.16 0.70 3 = 2.10 R 9.00 8.00 10.06 2.16 2.10 31.32
Power
1.08 6 = 6.48 0.70 4 = 2.80 P 6.00 1.60 2.52 6.48 2.80 19.40
Material handling
Total cost per unit Direct material Direct labour Material receipt costs Power costs Material handling costs
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Question 3 (a) Number of machine hours = D = E = F 1,500 3 2,500 2 14,000 6 = = = = 4,500 5,000 84,000 93,500
Overhead absorption rate
935,000 93,500
= 10 per machine hour Cost per unit Material Labour Overhead D 18 8 30 56 E 10 24 20 54 = 90 + 138 + 576 = 804 327,250 804 = 407.03 per set-up = = 16 + 28 + 116 = 160 187,000 160 = 1,168.75 = 140,250 93,500 = 1.50 = = 180 + 216 + 804 = 1,200 280,500 1,200 = 233.75 = F 20 16 60 96
(b)
Total number of set-ups
Absorption rate per set-up
Total number of issues
Absorption rate per issue
Absorption rate per machine hour
Total number of inspections
Absorption rate per inspection
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Overheads per unit Set-up
D 90 407.03 1,500 = 24.42
E 138 407.03 2,500 = 22.47
F 576 407.03 14,000 = 16.75
Issue
16 1,168.75 28 1,168.75 116 1,168.75 1,500 2,500 14,000 = 12.47 = 13.09 = 9.68 3 1.50 = 4.50 180 233.75 1,500 = 28.05 2 1.50 = 3 216 233.75 2,500 = 20.20 6 1.50 = 9 804 233.75 1,400 = 13.42
Machining
Inspection
Total cost per unit Material Labour Set-up costs Handling costs Machine costs Inspection costs
D 18.00 8.00 24.42 12.47 4.50 28.05 95.44
E 10.00 24.00 22.47 13.09 3.00 20.20 92.76
F 20.00 16.00 16.75 9.68 9.00 13.42 84.85
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Question 4 (a) Total labour hours = P 4 1 5,000 = 60,000 Q 6 1 0,000 = 60,000 R 3 4 ,000 = 12,000 132,000
Total overheads = 1,834,000 Total absorption rate 1,834,000 132,000 = 13.89 P 20.00 40.00 55.56 115.56 Q 15.00 60.00 83.34 158.34 R 10.00 30.00 41.67 81.67
Cost per unit Direct material Direct labour Production overheads
(b)
Cost driver absorption rates Machining 684,000 114,000 = 6.00 per machine hour 60,000 (6 + 14 + 40) = 1,000 per production run Receiving costs 240,000 (12 + 28 + 80) = 2,000 per receipt Packing costs 300,000 (30 + 20 + 50) = 3,000 per order delivered Engineering costs 450,000 (45 + 30 + 75) = 3,000 per production order
Set-up costs
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Overhead cost per unit Machining
P 6.00 4 = 24.00 6 1,000 15,000 = 0.40 12 2,000 15,000 = 1.60 30 3,000 15,000 = 6 45 3,000 15,000 = 9
Q 6.00 3 = 18.00 14 1,000 10,000 = 1.40 28 2,000 10,000 = 5.60 20 3,000 10,000 = 6 30 3,000 10,000 = 9
R 6.00 6 = 36.00 40 1,000 4,000 = 10 80 2,000 4,000 = 40 50 3,000 4,000 = 37.50 75 3,000 4,000 = 56.25
Set-up costs
Receiving costs
Packing costs
Engineering costs
Total cost per unit Direct material Direct labour Machining Set-up Receiving Packing Engineering
P 20.00 40.00 24.00 0.40 1.60 6.00 9.00 101.00
Q 15.00 60.00 18.00 1.40 5.60 6.00 9.00 115.00
R 10.00 30.00 36.00 10.00 40.00 37.50 56.25 219.75
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Question 5 (i) Total Factory Overheads = 90,000 135,000 105,000 120,000 150,000 600,000
Total machine hours Absorption rate
= 75,000 600,000 75,000 = 8 per machine hour X 5.00 8.00 24.00 37.00 Y 8.00 12.00 16.00 36.00
Cost per unit Material Labour Overheads
(ii)
Cost Driver Absorption Rates Quality control 90,000 450 135,000 450 105,000 1,000 120,000 2,000 150,000 75,000 = 200 per inspection
Process set-up
= 300 per set-up
Purchasing
= 105 per order
Order processing
= 60 per order
Occupancy costs
= 2 per machine hour
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Overhead cost per unit Quality control
X 150 200 10,000 = 3 150 300 10,000 = 4.50 500 105 10,000 = 5.25 1,000 60 10,000 = 6 6
Y 210 200 6,000 =7 210 300 6,000 = 10.50 300 105 6,000 = 5.25 800 60 6,000 = 8 4
Process set-up
Purchasing
Order processing
Occupancy
Cost per unit Material Labour Quality control Set-up Purchasing Order processing Occupancy
X 5.00 8.00 3.00 4.50 5.25 6.00 6.00 37.75
Y 8.00 12.00 7.00 10.50 5.25 8.00 4.00 54.75
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MULTI-PRODUCT BREAK-EVEN ANALYSIS
Section 2
Multi-Product Break-Even Analysis
You will recall from your studies of Break-Even Analysis in Higher Accounting that the basis of this technique was the ability to classify all costs in an enterprise as either fixed or variable. That is not to say that all costs are either totally fixed or totally variable. Indeed there will be very few costs in the long run which could be said to fall into either of these categories. However, the assumption that is made is that all costs will be made up of a variable component and a fixed component, and that these can be separated. Thus we could add all the variable components together to arrive at a total variable cost per unit, and all the fixed components to arrive at total fixed costs, e.g. if we consider a cost like machine maintenance it can be argued that there would be a minimum amount of maintenance required even if production was zero. That then would constitute the fixed component of machine maintenance. Then, of course, as output builds up the machines will be subject to more wear and tear and breakdowns, and thus require more and more maintenance. This would constitute the variable component of machine maintenance. However, in your past studies the behaviour of costs (i.e. how costs change as output changes) was kept relatively simple (e.g. direct costs like material and wages were often assumed to be perfectly variable and costs like rent assumed to be perfectly fixed). In fact there were a number of assumptions made in break-even analysis which had the effect of keeping things relatively simple e.g. the relationship between sales revenue and volume was based on the assumption that the selling price was constant at all levels of output and variable costs per unit were also assumed to stay constant. As far as this section of notes is concerned there was one further assumption which simplified matters and which we are now going to relax, i.e. we assumed that we were dealing with a single product model or perhaps, if there were more than one product, we assumed a constant sales mix.
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Therefore what we are now going to consider is the effect of several products on the calculations of break-even and profit and loss and the effect of changes in product or sales mix. Basic Concepts of Break-Even Analysis It is perhaps worth revising the basic relationships which Break-Even Analysis depends on. As already stated the starting point is Total Costs = Fixed Costs + Variable Costs Since, by definition, fixed costs have no relationship with output/sales no attempt is made to arrive at a total cost per unit. The next step is to find what is left over out of sales revenue once the variable costs have been met. This is called the contribution. Contribution = Sales Variable Costs It is so called because it is the contribution towards paying the fixed costs. If there is sufficient contribution to pay the fixed costs and have something left over then that will be profit (since all costs have now been met). If there is insufficient contribution to cover the fixed costs then a loss will be made (since the total costs have exceeded sales revenue). In between these two situations there must be a point where there is just sufficient contribution to pay the fixed costs and thus neither a profit nor a loss is made. This is known as Break-Even Point and is where Contribution = Fixed Costs Remember as we said above Contribution Fixed Costs = Profit (if positive) = Loss (if negative)
The key to calculating the profit or loss in any situation is therefore contribution, and profit/loss can only be found by two steps, i.e. find contribution by comparing sales and variable costs deduct fixed costs from contribution to determine profit or loss.
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Break-Even Point is important, because it marks the output level where a business moves from loss into profit; therefore there is an important formula which allows us to calculate it, i.e. Break-Even Point (units) = Fixed Costs Contribution per unit
To convert this into Break-Even Sales we only need to multiply the breakeven units by the selling price per unit. Break-Even Point () = B/E units Selling Price per unit There is one other relationship which is important in break-even analysis and that is the relationship between contribution and sales value. This is calculated as contribution/sales and is sometimes referred to as the Profit/Volume Ratio, although it can be referred to simply as the contribution/sales ratio. The important thing about this ratio is that it will remain constant at all levels of output. This is because all the constituent parts of the ratio are by definition variable, i.e. sales, variable costs and consequently contribution. It must be remembered, however, that this ratio will only remain constant as long as the basic assumptions mentioned earlier hold true, i.e. a constant selling price per unit and a constant variable cost per unit. The advantage of this ratio is that once calculated you can apply it at any level of output and thus determine the contribution earned from a particular level of sales or the sales necessary for a particular level of contribution and hence profit.
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Multi-Product Break-Even The problem with calculating the break-even point for a business with more than one product is that another variable has been added, i.e. the product mix. Product mix means the relative percentage or share of total sales which each product represents. If each product earns a different contribution per unit then any change in the relative volume of sales of each product will cause difficulties. The way round this is to calculate a weighted average contribution per unit to apply when calculating the break-even point. Example CMA plc produce a range of three products to which the following details relate: Product Selling Price p.u. Variable Costs p.u. Basic 205 130 Special 250 145 Deluxe 350 200
Fixed costs for CMA plc total 600,000 Let us take each product in turn and calculate what the break-even point would be if only that product were produced and sold. Basic Contribution per unit = 205 130 = 75 600,000 75 = 8,000 =
Break-Even Point (units)
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Special Contribution per unit = 250 145 = 105 600,000 105 = 5,715 (approx.) =
Break-Even Point (units) Deluxe Contribution per unit
= 350 200 = 150 600,000 150 = 4,000 =
The two extreme outcomes for break-even are 8,000 units if all sales were the basic model and 4,000 units if all sales were deluxe. Therefore any sales mix will be bound to produce a break-even point which lies somewhere between these two levels. Given a sales mix the break-even point can be found using the familiar formula but using a weighted average contribution per unit. Using the figures from the above example let us calculate the break-even point if sales were split evenly between the three products. Weighted Average Contribution per unit = (1/3 75) + (1/3 105) + (1/3 150) = 25 + 35 + 50 = 110 600,000 110 = 5454.5 = 5455 =
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We can prove that this is correct by working out the relevant figures. Basic 1,818 372,690 236,340 136,350 Special 1,818 454,500 263,610 190,890 Deluxe 1,818 636,300 363,600 272,700
Sales (units) Sales () Variable Costs Contribution Total Contribution Fixed Costs
599,940 600,000 60 (caused by rounding units)
Now let us see what happens when the sales mix changes. Suppose the product mix is 3:2:1 for Basic/Special/Deluxe. Total sales are then represented by Basic 3/6 = 1/2 Special 2/6 = 1/3 Deluxe 1/6 Weighted Average Contribution per unit = (1/2 75) + (1/3 105) + (1/6 150) = 37.50 + 35 + 25 = 97.50 Break-Even Point (units) 600,000 97.50 = 6154 (nearest unit) =
The answer is greater than the previous answer and that makes sense because we have moved to a situation where we are selling most of the product which has the lowest contribution per unit and we are selling fewest of the one with the highest contribution per unit.
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Once again we can prove that this is the correct answer by multiplying out the figures. Total Units = 6,154 Split as follows: Basic Special Deluxe Basic 630,785 400,010 230,775 3077 (1/2) 2051 (1/3) 1026 (1/6) Special Deluxe 512,750 359,100 297,395 205,200 215,355 153,900
Sales () Variable Costs Contribution Total Contribution Fixed Costs
600,030 600,000 30 (due to rounding)
This approach can then be used to answer the typical range of questions which you associate with basic break-even problems, i.e. calculating the level of sales required to earn a specified profit. For example, using the sales mix of 3:2:1 above calculate the sales in units of each product which would produce a profit of 100,000. Remember in marginal or break-even problems there is no direct connection between units and profit, and therefore we must convert profit into contribution. Contribution = Fixed Costs + Profit = 600,000 + 100,000 = 700,000 700,000 97.50 = 7,180 (approx) = = 1/2 7,180 = 3,590 = 1/3 7,180 = 2,393 = 1/6 7,180 = 1,197
Total No. of Units Required
Units of Basic
Units of Special
Units of Deluxe
36
Let us just prove that this is the correct solution. Basic 735,950 466,700 269,250 Special 598,250 346,985 251,265 Deluxe 418,950 239,400 179,550
Sales () Variable Costs Contribution Total Contribution Less: Fixed Costs Profit
700,065 600,000 100,065 (due to rounding)
If we now consider the opposite type of problem: How much profit will be made from sales of 9,000 units, also assuming a ratio of 3:2:1 between sales of the three products? Once again we must convert the units into contribution before we can calculate profit. Contribution from 9,000 units Less: Fixed Costs Profit = 9,000 97.50 = 877,500 600,000 277,500
Once again we can prove the result: Sales Mix Basic 1/2 9,000 = 4,500 Special 1/3 9,000 = 3,000 Deluxe 1/6 9,000 = 1,500 Basic 922,500 585,000 337,500 877,500 600,000 277,500 Special 750,000 435,000 315,000 Deluxe 525,000 300,000 225,000
Sales () Variable Costs Contribution Total Contribution Fixed Costs
Here are some questions to try.
37
Question 1
Clear Picture Ltd produce two models of television sets, Brilliant and Super Bright to which the following details relate for the current year. Brilliant 250 125 5,000 Super Bright 350 190 2,500
Selling price per set Variable cost per set Current sales (units)
Fixed costs (a)
600,000
Calculate the profit which Clear Picture would earn from the above situation. Calculate the total number of sets which require to be sold to break even if the above sales mix applies. Prepare a detailed Profit Statement to show the full figures for each product at break-even point. What would the break-even point be if the sales mix changed to three Brilliant sets for every Super Bright set? Explain why the increase/decrease in break-even point was predictable.
(b)
(c)
(d)
(e)
38
Question 2
MPV plc manufactures and sells three products with the following selling prices and variable costs: Basic 3.00 2.10 500,000 Superior 3.75 1.50 230,000 Supreme 5.00 3.25 190,000
Unit selling price Unit variable cost Current sales (units)
Existing fixed costs amount to 1,000,000. (a) Calculate the total number of units MPV plc will require to sell in order to break even if the current sales mix persists. Prepare a Profit Statement showing the relevant figures for the three products to prove your answer to (a).
(b)
39
Question 3
Easylearn Ltd provide expert tutoring on a range of subjects. Next years budget shows the following expected figures: Accounting 2,500 40 10 Maths 3,000 50 15 English 3,500 45 9 French 1,000 35 10
Expected hours of work Charge per hour Variable cost per hour
Fixed costs for the year are expected to be 198,600. (a) Calculate the total number of hours Easylearn Ltd will have to work to break even, assuming the above mix of tutoring hours. Calculate the contribution from each subject and in total at break-even point. Using the same mix as above prepare a Profit Statement for Easylearn plc to earn a profit of 100,000. The actual hours provided during the year turned out to be: Accounting Maths English French 1,500 1,000 4,500 3,000
(b)
(c)
(d)
Calculate the break-even number of hours.
40
Solutions
Question 1 (a) Contribution p.u. Total Contribution Brilliant 125 5,000 125 = 625,000 Super Bright 160 2,500 160 = 400,000
Total Contribution for company less: Fixed Costs Profit
1,025,000 600,000 425,000
(b)
Sales (units)
Brilliant Super Bright
5,000 2,500 7,500
67% 33% 100%
Weighted Average Contribution p.u.= (125 67%)+(160 33%) = 83.75 + 52.80 = 136.55 B/E Point (units) = 600,000 136.55
= 4,394 (nearest unit) (c) Sales (units) Brilliant 4394 67% 2944 Brilliant 507,500 368,000 368,000 600,000 600,000 Super Bright 4394 33% 1450 Super Bright 275,500 232,000
Profit Statement for Year Sales 736,000 Variable Costs Contribution Total Contribution less: Fixed Costs
41
(d)
Weighted Average Contribution p.u. = (125 75%)+(160 25%) = 93.75 + 40 = 133.75 B/E point (units) = 600,000 133.75
= 4,486
(e)
Since they were selling more of the product with the lower contribution per unit, it was inevitable that the break-even point would increase.
42
Question 2 (a) Sales (units) Basic Superior Supreme 500,000 230,000 190,000 920,000 = 0.90 = 2.25 = 1.75 = (0.90x0.5435)+(2.25 x 0.25) + (1.75 0.2065) = 48.915p + 56.25p + 36.138p = 141.303p = 1,000,000 1.413 0.5435 0.25 0.2065 1.0 or or or 54.35% 25% 20.65% 100%
Contribution per unit
Basic Superior Supreme
Weighted Average Contribution p.u.
B/E point (units)
= 707,714 (b) Total Sales (units) = 707,714 Basic Superior Supreme = 707,714 0.5435 = 707,714 0.25 = 707,714 0.2065 = 384,643 = 176,928 = 146,143
MPV Profit Statement Basic 1,153,929 807,750 346,179 Superior 663,480 265,392 398,088 Supreme 730,715 474,965 255,750 Total 2,548,124 1,548,107 1,000,017 1,000,000 17
Sales Variable Costs Contribution Fixed Costs
43
Question 3 (a) Tutoring hours: Accounting Maths English French 2,500 3,000 3,500 1,000 10,000 30 35 36 25 25% 30% 35% 10% 100%
Contribution per hour
Accounting Maths English French
Weighted Average Contribution per hour = (30 25%) + (35 30%) + (36 35%) + (25 10%) = 7.50 + 10.50 + 12.60 + 2.50 = 33.10 B/E Point (hours) = 198,600 33.10
= 6,000
(b) Hours of Tutoring Contribution
Accounting 1,500
Maths 1,800
English 2,100
French 600
Total 6,000
1,500 30 45,000
1,800 35 63,000
2,100 36 75,600
600 25 15,000 198,600
44
(c)
Contribution required
= 198,600 + 100,000 = 298,600 = 298,600 33.10
Number of hours required
= 9,021 (nearest hour) Hours per subject: Accounting Maths English French 25% 30% 35% 10% 2,255 2,706 3,158 902
Profit Statement for Easylearn Ltd Accounting 90,200 22,550 67,650 Maths 135,300 40,590 94,710 English 142,110 28,422 113,688 French 31,570 9,020 22,550 Total 399,180 100,582 298,598 198,600 99,998
Sales Variable Costs Contribution less: Fixed Costs Profit
(d)
Accounting Maths English French
1,500 1,000 4,500 3,000 10,000
15% 10% 45% 30% 100%
Weighted Average Contribution per unit = (15% 30) + (10% 35) + (45% 36) + (30% 25) = 4.50 + 3.50 + 16.20 + 7.50 = 31.70 B/E Point (hours) = 198,600 31.70
= 6,265
45
CONTRACT COSTING STATEMENTS
Section 3
Contract Costing Statements
A long-term contract is defined as: A contract entered into for the design, manufacture or construction of a single substantial asset or the provision of a service where the time taken to complete the contract is such that the contract activity falls into different accounting periods. So a contract is really an example of job costing with the following important features: it usually takes a long time to complete it is usually completed at a particular site which is not the contractors workplace. Therefore contracts are common in most types of building and construction work, civil engineering, shipbuilding, etc. These contracts pose a particular problem for the accountant, i.e. when should any profit on the contract be recognised in the accounts? The problem arises because there is a conflict between two fundamental accounting concepts or principles, i.e. matching and prudence. The matching or accruals concept states that income and expenditure should be matched against one another and placed in the accounting period to which they relate. Clearly in the case of long-term contracts the costs and indeed the revenues will overlap more than one accounting period. Because a contractor cannot wait until the end of a contract before he receives any income from it, the work is valued at regular intervals by architects who certify the value of the work at selling price. When this is compared with the costs incurred to date it may well indicate a profit on the contract.
46
However, the prudence concept states that profits should not be anticipated and therefore recording profit on an incomplete contract could be construed as breaching that concept. As with many problems where basic principles conflict, the resolution of the problem is something of a compromise. It would clearly be unacceptable only to recognise contract profit at the end of the contract. This would mean that in any accounting period the profits would simply relate to those contracts which had finished during the period, irrespective of the length of period of the contracts. It seems that recognition of profit on a contract would be acceptable as long as the concept of prudence is not ignored. Statement of Standard Accounting Practice Number 9 (SSAP 9) gives guidance on this matter. It states that profits should only be recognised on a contract when its outcome can be assessed with reasonable certainty. The profit to be included should be calculated prudently and should reflect the amount of work completed at the accounting date. On the other hand if losses are anticipated they must be recognised in full. The standard does not give unequivocal guidance on a formula to be applied in recognising profit on a contract, and several methods have been developed which meet the underlying principles outlined above. One approach is to determine the expected profit at the conclusion of the contract and recognise a proportion of this figure based on the percentage completion of the contract at the appropriate date.
47
Consider the following example: At 31 December Year 4 the figures relating to an incomplete contract are as follows: 3m 1m 4m 5m
Costs to date Estimated costs to complete Value of certified work Contract price
We can calculate the expected outcome of the contract as follows: Cost of work completed Add: estimated costs to complete estimated total costs contract price estimated profit Profit Recognised = 3m 1m 4m 5m 1m
Estimated Profit Value of Certified Work Contract Price 1m 4m 5m
= 800,000 However, if a contract is not close to completion the forecast of expected profits may be deemed to be too unreliable to adopt as a basis for profit recognition. In these circumstances the fraction may be based on the notional profit at that point in the life of the contract rather than on the estimated profit at the end of the contract, i.e. Profit recognised = Work Certified Notional Profit Contract Price
What is important is that whichever formula is used takes into account the degree of completion of the contract, which both of the formulae above do.
48
Preparing Contract Accounts Example A builder is currently working on two major contracts, both of which are incomplete at the end of his financial year on 31st March Year 7. The details of the contracts are as follows: Contract A 000s Opening Balances at 1st April Year 6 Completed Work Materials on Site Plant & Machinery (written down value) Wages Accrued Costs Incurred During Year to 31st March Year 7 Materials Delivered to Site Wages Paid Salaries Value of Plant Delivered Head Office/Establishment Charges Apportioned Closing Balances at 31st March Year 7 Materials on Site Value of Plant on Site Wages Accrued Other Details Value of Work Certified at year end Contract Price Profit is recognised using the following formula: Work Certified Notional Profit Contract Price Prepare accounts for each of the contracts showing clearly the calculations of any profit to be taken for the period. Contract B 000s 1,620 80 300 20
340 180 60 800 40
880 400 160 140 80
80 600 20
80 40
800 1,200
3,200 5,800
49
Solution
Materials Wages Paid add: accrued Salaries Plant & Machinery Head Office costs Contract A a/c 340 180 20 Balances c/d material plant Cost of contract to date
200 60 800 38 1,438 758 28 12 800 80 600
80 600 758
1,438 Work Certified 800
Cost of Contract Profit & Loss a/c (Profit Taken) Profit not Taken
800 Balances b/d wages 20
Balances b/d: material plant Working Notional Profit
= Value of Work Certified less cost of contract to date = 800 758 = 42 800 42 1,200 = 28 =
Profit Recognised
The first step is to charge or debit the Contract a/c with all the costs incurred during the year to date, including any accruals, e.g. in this case wages accrued. However, not all of these costs have been used up in the course of the year so any remaining unused, i.e. material and plant and machinery are carried down as balances to start the next period. This allows the cost of the contract to date to be calculated as the sum of the debit entries less the credit balances being carried forward. The working for the notional profit and the part of it which is going to be recognised can now be done, using whichever formula the question suggests. The profit taken is then debited to the account as it will go to the credit of the Profit & Loss a/c.
50
Contract B a/c Balances b/d Completed Work Material Plant & Machinery Materials Delivered Wages Paid add accrued Salaries Plant & Machinery Head Office Costs Cost of Contract 1,620 80 300 880 400 40 440 160 140 80 3,700 3,600 Balance b/d: Wages Balances c/d: Plant Cost of Contract to date 20 80 3,600
Work Certified Profit & Loss (Loss written off)
3,700 3,200 400 3,600 40
3,600 Balances b/d: plant 80 Balances b/d wages
There are a number of differences to be accounted for with Contract B. Firstly, this is a contract which was already under way at the start of the year and therefore has opening balances which must be entered in the account to start with. Thereafter the procedure is the same, but when we attempt to calculate the notional profit we discover that in fact the contract is showing a loss at this point in time. When that happens we have to write off the whole of the loss (there is no division into part recognised and part not recognised) to comply with the prudence concept. The above question illustrated a number of basic principles of accounting for longterm contracts: how how how how to to to to deal with opening balances calculate notional profit apply formulae for recognising profit treat anticipated losses.
The following questions give you the opportunity to test your understanding of these principles. Some of the questions are based on previous Higher Accounting or Higher Accounting and Finance paper questions.
51
Question 1
(based on Higher Paper II 1997 Q7) JBC plc, a construction company, undertook a 2-year contract with Factory Outlets Ltd for a fixed price of 1m. Work began in September of Year 5 and on 1 January Year 6 the following information was available. Direct materials on site Plant at cost on site 10,000 90,000
At 31 December Year 6 the following information was available. 350,000 5,000 2,000 337,000 20,000 28,000 2,000 1,000 6,000 2,000 78,000 850,000 15,000 3,000 3,000
Direct materials sent to site Materials requisitioned from stores Materials returned to stores Direct wages paid Direct expenses Sub-contracting costs Architects fees Insurance Hire of special equipment Plant maintenance Value of plant on site at 31 Dec Year 6 Value of work certified by architect Cost of work not yet certified at 31 Dec Year 6 Direct wages due at 31 Dec Year 6 Direct materials on site at 31 Dec Year 6 Overheads are charged at 10% of Direct Wages cost. JBC plc recognises profit using the formula Notional Profit Work Certified Contract Price
Prepare the Contract Account at 31 December Year 6 showing clearly the profit recognised.
52
Question 2
(based on Higher 1993 Paper II Q2) Appin Builders plc started work on a 3-year contract on 1 April Year 2 at a contract price of 5m. On 31 March Year 3 the following information was available. 000s 75 375 50 48 250 85 20 1,000 150 50 23 10
Plant sent to site Materials sent to site Materials delivered from store Sub-contracting costs Direct wages Direct expenses Hire of scaffolding Work certified by architect Cost of work not yet certified Value of plant at 31 March Year 3 Material unused on site at 31 March Year 3 Accrued wages
Overheads are recognised at 10% of Direct Material costs (including sub-contract costs). Appin Builders plc recognise profit using the formula Notional Profit Work Certified Contract Price
Prepare the Contract Account for year ended 31 March Year 3.
53
Question 3
(based on Higher 1992 Paper II Q4(a)) Contract Builders plc undertook a 3-year contract in January Year 4 for a fixed price of 4,800,000. On 31 December Year 4 the following information was available relating to the first year of the contract. 000s 535 380 180 200 110
Materials sent to site Direct wages paid Direct expenses Overhead charged Plant hire At 31 Dec Year 4 Material on site Wages accrued Value of work certified Cost of work completed but not certified
10 20 1,000 165
Prepare the Contract Account for the year ended 31 December Year 4.
54
Question 4
The following information relates to Contract 654 of Builders plc at 31 December Year 5. 108,400 1,320 3,100 84,310 25,500 10,000 40,137 10,172
Materials sent to site Materials delivered from store Materials transferred to other contracts Direct wages Plant purchased Plant transferred from other contracts Sub-contract costs Site expenses At 31 December Year 5 Materials on site Value of plant on site Accrued wages Site expenses prepaid Value of work certified Contract price Overheads are charged at 10% of wages cost. Profits are recognised using the formula Notional Profit Work Certified Contract Price
36,680 29,500 1,840 1,014 420,000 560,000
Prepare the Contract 654 Account for year ended 31 December Year 5.
55
Solutions
Question 1 10,000 90,000 350,000 5,000 337,000 3,000 20,000 28,000 2,000 1,000 6,000 2,000 34,000 888,000 805,000 51,000 9,000 865,000 = = = 850,000 (805,000 15,000) 850,000 790,000 60,000 850,000 1,000,000 2,000 3,000 78,000 805,000
Material b/f Plant b/f Material sent to site Materials taken from stores Direct wages paid add: accrued Direct expenses Sub-contract costs Architects fees Insurance Hire of equipment Plant maintenance Overheads
Material returned to stores Material c/d Plant c/d Cost of contract
. 888,000 Value of work certified Cost of work not certified 850,000 15,000 . 865,000
Cost of contract Profit taken Profit not taken
Notional profit
Profit taken
= 60,000 = 51,000
56
Question 2 Contract a/c 000s 375 50 48 75 250 10 260 85 20 45 958 000s 23 50 885
Material sent to site Material from store Sub-contract costs Plant sent to site Direct wages Add: accrued Direct expenses Hire of scaffolding Overheads (10% 450)
Material c/d Plant c/d Cost of contract
958 1,000 150 1,150
885 Value of work certified 53 Cost of work not certified 212 1,150 = 1,000 (885 150) = 1,000 735 = 265 = 1,000 265 5,000
Notional Profit
Profit Taken
= 53
57
Question 3 Contract a/c 000s 535 380 20 400 180 110 200 1,425 1,415 1,415 Profit/loss on contract Loss
Material Wages add: accrued Direct expenses Plant hire Overheads
Material c/d Cost of contract
000s 10 1,415
1,425 Value of work certified 1,000 Value of work not certified 165 Loss on contract 250 1,415
Cost of contract
= 1,000 (1,415 165) = 1,000 1,250 = 250
58
Question 4 Contract 654 a/c Material sent to site Material from store Direct wages add: accrued Plant purchased Plant transferred Sub-contract costs Site expenses less: prepaid Overheads 108,400 1,320 84,310 1,840 86,150 25,500 10,000 40,137 9,158 8,615 289,280 220,000 150,000 50,000 420,000 = 420,000 220,000 = 200,000 = 200,000 = 150,000 420,000 560,000 Work certified Material transferred Material c/d Plant c/d Cost of contract 3,100 36,680 29,500 220,000
10,172 1,014
289,280 420,000 420,000
Notional profit
Profit taken
59

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NATIONAL QUALIFICATIONS CURRICULUM SUPPORT

MANAGERIAL ACCOUNTING (AH)

Learning and Teaching Scotland 2005

MANAGERIAL ACCOUNTING (AH) Learning and Teaching Scotland 2005

MANAGERIAL ACCOUNTING (AH)

Learning and Teaching Scotland 2005

ACTIVITY-BASED COSTING (ABC)

Apportionment using selected basis

Single Cost Centre

Multiple Cost Centres

Production Cost Centres

Service Cost Centres

MANAGERIAL ACCOUNTING (AH) Learning and Teaching Scotland 2005

ACTIVITY-BASED COSTING (ABC)

MANAGERIAL ACCOUNTING (AH)

Learning and Teaching Scotland 2005

ACTIVITY-BASED COSTING (ABC)

As with the traditional approach, ABC can be illustrated by a diagram:

Identify major activities

Create cost pool for each activity

Identify cost driver for each activity

Produce absorption rate for each pool based on cost driver

Overhead cost per unit

MANAGERIAL ACCOUNTING (AH) Learning and Teaching Scotland 2005

ACTIVITY-BASED COSTING (ABC)

Machining Set-up Assembling Goods Receiving Dispatch

MANAGERIAL ACCOUNTING (AH)

Learning and Teaching Scotland 2005

ACTIVITY-BASED COSTING (ABC)

MANAGERIAL ACCOUNTING (AH) Learning and Teaching Scotland 2005

ACTIVITY-BASED COSTING (ABC)

We can now calculate the factory-wide rate = 676,000 104,000

= 6.50 per labour hour

MANAGERIAL ACCOUNTING (AH)

Learning and Teaching Scotland 2005

ACTIVITY-BASED COSTING (ABC)

MANAGERIAL ACCOUNTING (AH) Learning and Teaching Scotland 2005

ACTIVITY-BASED COSTING (ABC)

Set-up Assembling Goods Receiving Dispatch

56,000 8 80,000 10 128,000 32 100,000 10

MANAGERIAL ACCOUNTING (AH)

Learning and Teaching Scotland 2005

ACTIVITY-BASED COSTING (ABC)

MANAGERIAL ACCOUNTING (AH) Learning and Teaching Scotland 2005

ACTIVITY-BASED COSTING (ABC)

MANAGERIAL ACCOUNTING (AH)

Learning and Teaching Scotland 2005

ACTIVITY-BASED COSTING (ABC)

MANAGERIAL ACCOUNTING (AH) Learning and Teaching Scotland 2005

ACTIVITY-BASED COSTING (ABC)

Material receipt costs Power costs Material handling costs

MANAGERIAL ACCOUNTING (AH)

Learning and Teaching Scotland 2005

ACTIVITY-BASED COSTING (ABC)

Set-up costs Handling costs Machining costs Inspection costs

Number of set-ups Number of material issues Number of inspections (b)

MANAGERIAL ACCOUNTING (AH) Learning and Teaching Scotland 2005

ACTIVITY-BASED COSTING (ABC)

MANAGERIAL ACCOUNTING (AH)

Learning and Teaching Scotland 2005

ACTIVITY-BASED COSTING (ABC)

Quality control Process set-ups Purchasing Order processing Occupancy costs

MANAGERIAL ACCOUNTING (AH) Learning and Teaching Scotland 2005