Sunshine Co Ltd produces two types of window frame, aluminiumand wooden. The company’s simple costing system has two direct cost categories (materials and labour) and one indirect cost pool. The simple costing system allocates indirect costs on the basis of machine hours.
Recently, the owners of Sunshine have been concerned about a decline in the market share for aluminium, usually their biggest seller. Information related to Sunshine’s production for the most recent yearfollows:
Direct material cost per unit
Direct manufacturing labor cost per hour
Direct manufacturing labourhours per unit
Number of inspections
The owners have heard of other companies in the industry that are now using an activity-based costing system and are curious how an ABC system would affect their product costing decisions. Afteranalyzing the indirect cost pool for Sunshine, six activities wereidentified as
generating indirect costs: production scheduling, material handling,machine setup, assembly, inspection, and marketing. Sunshine collected the following data related to the indirect cost activities:
Activity Cost Driver
Number of inspections
Marketing costs were determined to be 3% of the sales revenue for each type of window.
aCalculate the costofan window and a window underthe existing costing(8
bCalculate the costofan window and a window underan costing(14
c the costs ofthe window in (a) and (b).Explain the and costing differinthe costofanwindow and a window (6
d howSunshine Ltd use the newcostfromits costingto address the decliningshare forinteriordoors. (7
Ting Ho Company began operations in January 20×2. All its costs are fixed; they do not vary with output.
Ting Ho Company is located in Science Park and has its ownhydroelectric plant to supply power, light, and heat. The companymanufactures a synthetic energy bar from air and river water and sells its product at a price that is not expected to change. It has a small staff of employees, all paid fixed annual salaries. The output of the plant can be increased or decreased by adjusting a few dials on a control panel.
The following budgeted and actual data are for the operations of Ting Ho Company. Ting Ho uses budgeted production as the denominator level and writes off any production-volume variance to cost of goods sold.
$25 per ton
$25 per ton
Costs (all fixed):
a with one for20x2, one for20x3, and one forthe two using(a)costingand (b)absorption costinga of10,000 tons. (18
b the costs thatwould be carried in the balancesheeton 31 20×2 and 20×3, undereach (3
c thatthe ofthe top ofthe is and on the basis ofreported operating Which costing would the prefer? Explain.
Wing Fung Ltd. is a manufacturer of photocopier with the samemanufacturing process for its product. Every effort is made to ensure that each photocopier is identical and meets the contractor’s performance specifications. The process-costing system at the plant has a single
direct-cost category (direct materials) and a single indirect-costcategory (conversion costs). All photocopiers pass through two departments: the Assembly Department and the Testing Department.Direct materials are added at the beginning of the process in Assembly. Conversion costs are added evenly during the AssemblyDepartment’s process. When the Assembly Department finishes workon each photocopier, it is immediately transferred to Testing.
Wing Fung Ltd. uses the weighted-average method of process costing.Data for the Assembly Department for October 20×4 are:
Work in process, 1 Octobera
Started during October 2010
Completed during October 2010
Work in process, 31 October b
Total costs added during October 2010
aDegree of completion: direct materials, ?%; conversion costs, 60%
bDegree of completion: direct materials, ?%; conversion costs, 70%
a For each cost category, compute equivalent units in the Assembly Department. Show physical units in the first column of your schedule.
(10 marks) b For each cost category, calculate cost per equivalentunit. (6 marks)
c Summarize total Assembly Department costs for October 20×4, and assign total costs to units completed and transferred out and to units in ending work in process. (6 marks)
Total Corporation is considering implementing a JIT production system. The new system would reduce current average inventorylevels of
$2,000,000 by 75% but would require a greater dependency on the company’s core suppliers for on-time deliveries and high-qualityinputs. The company’s operations manager, John Chan, is opposed to the idea of a new JIT system. He is concerned that the newsystem will be too costly to manage, will result in too many stock outs, and will lead to the layoff of his employees, several of whomare currently managing inventory. He believes that these layoffs will affect the morale of his entire production department. The plant controller, Stephen Li, is in favour of the new system, due to the likely cost savings. John wants Stephen to rework the numbersbecause he is concerned that top management will give moreweight to financial factors and not give due consideration to nonfinancial factors such as employee morale. In addition to the reduction in inventory described previously, Stephen has gatheredthe following information for the upcoming year regarding the JITsystem:
•insurance and warehousingcosts forwould bereduced by60%ofthe current of$350,000.
•expenses forcurrentstaffwould bereduced by15%ofthe totalof$600,000.
•Additionalannualcosts for and includingpersonnelcosts, would equal$220,000.
•The additionalofstockouts underthe newis to be 5%ofthe totalof 10,000 are forthe stockoutwouldresultin an additionalcostof$250.
•Total’s required rate ofreturn on is 10%per
aa financial whetherTotalCorporationshould adoptthe new(10
b Stephen whetherhe should the
c howStephen could John concern.
Source: All questions are adapted from 5-24 (p. 204), 9-28 (p. 386), 17-31 (p. 723), 20-36 (p. 823), Horngren, C T, Datar, S M andRajan, M (2015) Cost Accounting: A Managerial Emphasis, 15th edn, Upper Saddle River, NJ: Pearson.