ACC200 Term 3 2018 Assignment2

ACC200 Term 3 2018 Assignment2.

Question 1: ACC200 Term 3 2018 Assignment2

Calculations In Two Decimal Places

Calculate cost per unit of the two models of sewing machines under the current traditional costing system.

Calculate cost per unit of the two models of sewing machines under Activity based Costing.

Sewing easy sells the advance model at a price of total cost (under the current costing system) plus 30% and is willing to give the same selling price to the overseas buyer. The overseas buyer wants to purchase only the advance model. Prepare December 2017 Profit and Loss Statement for the advance model where (a)traditional costing is used to calculate the product cost (b) Activity Based Costing is used to calculate the product cost. Analyse why the overseas buyer is interested to buy only the advance model. In your discussion you should highlight the importance of accurate product costing.

Discuss why actual overhead and applied overhead may be different at year end and state three ways to deal with under/over applied overhead costs (no journal entries are required).

Assume actual overhead is \$300 000 and applied overhead is \$210 000 and also assume that at the end of the year the  inventory and the cost of goods sold accounts are as follows:

Work-in-process: \$60 500

Finished goods: \$90 000

Cost of goods sold is \$1 850 000

Calculate the under/over applied overhead and using the proration method dispose the under/over applied overhead (no journal entries are required).

Introduction

Computation of cost per unit for sewing machine under traditional method

Using the traditional method the company allocates the overheads based on the direct labour cost spend per unit for each model. However, it is unlikely that each model will consume the overhead at the same rate for which the labour cost is consumed. For instance, the inspection cost is \$ 30,000 and inspection for basic model is 210 and for advance model it is 760. Hence, it is justified to allocate the inspection cost based on the labour expenses.

From the above table, it can be identified that the direct cost per unit for basic model is \$ 525 whereas the same for advance model is \$ 860 per unit. Overhead cost per unit for basic model is \$ 63.35 and for advance model is \$ 347.38. The significant difference in overhead cost is due to the fact that selling and distribution expenses, office rent and interest expenses are incurred for the advance model only (Plank 2018). Total cost per unit for basic model as per traditional approach is \$ 588.35 whereas the same for advance model is \$ 1207.38 per unit.

Computation of cost per unit for sewing machine under activity based costing

Activity based costing allocates the overhead to products in more logical approach as compared to the traditional method of allocating the overhead on the basis of the labour hour. Under ABC approach the costs are allocated to the costs related to the activities those are real cause of the overheads. For instance, the inspection cost is \$ 30,000 and inspection for basic model is 210 and for advance model it is 760. Hence, the inspection cost will be allocated on the basis of number of inspection carried out for each model.

From the above table, it can be identified that as per ABC method the direct cost per unit for basic model is \$ 525 whereas the same for advance model is \$ 860 per unit. Overhead cost per unit for basic model is \$ 51.59 and for advance model is \$ 359.88. The significant difference in overhead cost is due to the fact that selling and distribution expenses, office rent and interest expenses are incurred for the advance model only (Keiser, Garner and Vandermar 2017). Total cost per unit for basic model as per ABC model is \$ 576.59 whereas the same for advance model is \$ 1219.88 per unit.