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ACT202: Target costing - Managing Activities And Managing Capacity - Managerial Accounting Assessment Answer
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Subject Code: ACT202
Internal Code: 1AGHDC
Required
1. Calculate the cost of a standard job and a special job under the traditional costing system and the activity-based costing system.
2. Compare the costs of a standard job and a special job under the two systems. Suggest reasons for the costs resulting from using one system differing from those from the other system.
3. Suggest how the managers of Speediprint might use the new cost information from its activity-based costing system to better manage the business.
Activity-based costing, activity-cost driver rates
Perfect Spuds (PS) operates at capacity and processes potatoes into potato cuts at its highly automated plant. It sells potatoes to the retail consumer market and to the institutional market, which includes hospitals, cafeterias and university dormitories.
PS’s costing system has a single direct -cost category (direct materials, which are the raw potatoes) and a single indirect -cost pool (production support). Support costs are allocated on the basis of kilograms of potato cuts processed. Support costs include packaging materials. The 2017 total actual costs for producing 1,000,000 kilograms of potato cuts (900,000 for the retail market and 100,000 for the institutional market) are:
Direct materials used $150,000
Production support $983,000
The costing system does not distinguish between potato cuts produced for the retail and the institutional markets. At the end of 2018, PS unsuccessfully bid for a large institutional contract. Its bid was reported to be 30% above the winning bid. This feedback came as a shock because PS included only a minimum profit margin on its bid. Moreover, its plant was acknowledged
as the most efficient in the industry.
As a result of its review process of the lost contract bid, PS decided to explore ways to refine its costing system. First, it identified that $188,000 of the $983,000 total production support costs related to packaging materials and could be traced to individual jobs ($180,000 for retail and $8000 for institutional).
These costs will now be classified as direct materials. The $150,000 of direct materials used were classified as $135,000 for retail and $15,000 for institutional. Second, it used ABC to examine how the two products (retail potato cuts and institutional potato cuts) used indirect support resources. The finding was that three activity areas could be distinguished:
Required
1. How much of the total costs in 2018 are value-added, non-value-added or in the grey area in between? Explain your answers briefly. What actions can Stratum take to reduce their costs?
2. What are the consequences of misclassifying a non-value-added cost as a value-added cost? When in doubt, would you classify a cost as a value-added or a non- value-added cost? Explain briefly.
3. Suppose that Stratum could eliminate all errors so that it did not need to spend any time making corrections and, as a result, could proportionately reduce professional labour costs. Calculate Stratum’s operating profit for 2018.
4. Now suppose that Stratum could take on as much business as it could complete but it could not add more professional staff. Assume that Stratum could eliminate all errors so that it does not need to spend any time correcting errors. Assume that
Stratum could use the time saved to increase revenues proportionately. Assume that travel costs will remain at $18,000. Calculate Stratum’s operating profit for 2018.
Managerial Accounting Assessment Answer
TASK: Speediprint Ltd owns a small printing press that prints leaflets, brochures and advertising materials. Speediprint classifies its various printing jobs as standard jobs or special jobs. Speediprint’s job-costing system has two direct-cost categories (direct materials and direct labour) and a single indirect -cost pool. Speediprint operates at capacity and allocates all indirect costs using printing machine-hours as the cost driver. Speediprint is concerned about the accuracy of the costs assigned to standard and special jobs and therefore is planning to implement an activity-based costing system. Speediprint’s ABC system would have the same direct -cost categories as its previous costing system. However, instead of a single indirect -cost pool there would now be six categories for assigning indirect costs: design, purchasing, set -up, printing machine operations, marketing and administration. To see how activity-based costing would affect the costs of standard and special jobs, Speediprint collects the following information for the 2018 financial year.
Required
1. Calculate the cost of a standard job and a special job under the traditional costing system and the activity-based costing system.
2. Compare the costs of a standard job and a special job under the two systems. Suggest reasons for the costs resulting from using one system differing from those from the other system.
3. Suggest how the managers of Speediprint might use the new cost information from its activity-based costing system to better manage the business.
Activity-based costing, activity-cost driver rates
Perfect Spuds (PS) operates at capacity and processes potatoes into potato cuts at its highly automated plant. It sells potatoes to the retail consumer market and to the institutional market, which includes hospitals, cafeterias and university dormitories.
PS’s costing system has a single direct -cost category (direct materials, which are the raw potatoes) and a single indirect -cost pool (production support). Support costs are allocated on the basis of kilograms of potato cuts processed. Support costs include packaging materials. The 2017 total actual costs for producing 1,000,000 kilograms of potato cuts (900,000 for the retail market and 100,000 for the institutional market) are:
Direct materials used $150,000
Production support $983,000
The costing system does not distinguish between potato cuts produced for the retail and the institutional markets. At the end of 2018, PS unsuccessfully bid for a large institutional contract. Its bid was reported to be 30% above the winning bid. This feedback came as a shock because PS included only a minimum profit margin on its bid. Moreover, its plant was acknowledged
as the most efficient in the industry.
As a result of its review process of the lost contract bid, PS decided to explore ways to refine its costing system. First, it identified that $188,000 of the $983,000 total production support costs related to packaging materials and could be traced to individual jobs ($180,000 for retail and $8000 for institutional).
These costs will now be classified as direct materials. The $150,000 of direct materials used were classified as $135,000 for retail and $15,000 for institutional. Second, it used ABC to examine how the two products (retail potato cuts and institutional potato cuts) used indirect support resources. The finding was that three activity areas could be distinguished:
- Cleaning activity area. PS uses 1,200,000 kilograms of raw potatoes to yield 1,000,000 kilograms of potato cuts. The cost driver is kilograms of raw potatoes cleaned. Costs in the cleaning activity area are $120,000.
- Cutting activity area. PS processes raw potatoes for the retail market independently of those processed for the institutional market. The production line produces (a) 250 kilograms of retail potato cuts per cutting-hour and (b) 400 kilograms of institutional potato cuts per cutting-hour. The cost driver is cutting-hours on the production line. Costs in the cutting activity area are $231,000.
- Packaging activity area. PS packages potato cuts for the retail market independently of those packaged for the institutional market. The packaging line packages (a) 15 kilograms of retail potato cuts per packaging-hour and (b) 50 kilograms of institutional potato cuts per packaging-hour. The cost driver is packaging-hours on the production line. Costs in the packaging activity area are $444,000. Required 1. Using the traditional costing system, calculate the cost per kilogram of potato cuts produced by PS. 2. Calculate the activity-driver rate in: (a) cleaning, (b) cutting and (c) packaging activities. 3. Using the ABC system, calculate the total costs and the costs per kilogram of retail potato cuts and institutional potato cuts. 4. Comment on the cost differences between the two costing systems in requirements 1 and 3. How might PS use the information in requirement 3 to make better decisions?
Required
1. How much of the total costs in 2018 are value-added, non-value-added or in the grey area in between? Explain your answers briefly. What actions can Stratum take to reduce their costs?
2. What are the consequences of misclassifying a non-value-added cost as a value-added cost? When in doubt, would you classify a cost as a value-added or a non- value-added cost? Explain briefly.
3. Suppose that Stratum could eliminate all errors so that it did not need to spend any time making corrections and, as a result, could proportionately reduce professional labour costs. Calculate Stratum’s operating profit for 2018.
4. Now suppose that Stratum could take on as much business as it could complete but it could not add more professional staff. Assume that Stratum could eliminate all errors so that it does not need to spend any time correcting errors. Assume that
Stratum could use the time saved to increase revenues proportionately. Assume that travel costs will remain at $18,000. Calculate Stratum’s operating profit for 2018.
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