UNSW Business School

ACCT2522 Management Accounting 1

Term 1, 2019

Topic 2: Managing Costs II –Activity-Based Costing

Week 3: Tutorial Questions

Overall Theme of this Tutorial

The aim of this topic is to draw attention to the problems with using traditional costing systems to assign costs
to cost objects, especially products and services; and to introduce a contemporary costing system that
addresses these problems – the Activity-Based Costing (ABC) system. In doing this, we compare the relative
merits of traditional and ABC techniques and explain when ABC systems are more appropriate. We also
consider how ABC information can be used for cost management and process improvement by tying this topic
to Activity-Based Management in Topic 1.

Desired Learning Outcomes and Essential Reading

 Langfield-Smith, K., D. Smith, P. Andon, R. W. Hilton and H. Thorne (2018). Management Accounting:
Information for Managing and Creating Value, 8th ed, McGraw-Hill Australia Pty Ltd. (Hereafter referred
to as LS)
 Chapter 3 p. 82
 Chapter 8 (including Appendix)

After completing this topic, you should be able to:

1. Explain the problems that may be associated with traditional/volume-based costing systems.
2. Describe and apply the activity hierarchy of costs and cost drivers.
3. Use ABC to measure overhead costs and assign costs to cost objects.
4. Evaluate the appropriateness of ABC.
5. Understand the limitations of ABC.

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 Tutorial Questions (must be prepared prior to the tutorial)

Question 1: Langfield-Smith Chapter 8: P8.39

Additional Questions:

(a) Construct an excel spreadsheet to help solve P8.39 by determining the cost of each product line
using an ABC system.

(b) Briefly discuss other qualitative issues (i.e. issues that are hard to quantify) Territory Electronics
Company should consider when deciding on whether to continue or discontinue a product line.

(c) Discuss how Territory Electronics Company can use ABC information to initiate process
improvement.

Question 2 (Modified past mid-session exam question)

Tech Ltd manufactures three types of tablets: TB (basic), TS (standard) and TP (premium). Tech
currently adopts a volume-based costing (VBC) system, and allocates its manufacturing overhead
costs (MOH) based on the number of tables produced. Tech is considering adopting an activity-based
costing (ABC) system. Hence, Tech implemented a pilot ABC system.

The VBC information collected for the month just ended are as follows.

TB TS TP Total

Number of tablets produced 1,000 600 400 2,000

($) ($) ($) ($)

Prime Costs 260,000 350,000 300,000 910,000
Manufacturing overhead (MOH) cost * 685,000 411,000 274,000 1,370,000
Total manufacturing cost 945,000 761,000 574,000 2,280,000

Cost per tablet 945.00 1,268.33 1,435.00

Sales price per tablet

(@≈40% mark-up of cost) 1,300 1,800 2,000

*MOH costs are allocated on the basis of number tablets produced

The cost of resources and resource drivers collected for the month just ended are as follows.

Quantity of
Resources $ Resource Driver Resource
Driver
Wages 1,625,000 # Employees 25
Electricity 200,000 # KW hours 10,000
Advertising 125,000 # Advertisements 10
Moulding machine depreciation 150,000 # Moulding machines 2
2,100,000

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Four main activities and their activity drivers are identified as follows:

Activities Resources Consumed Activity Drivers

6 Employees
Research & Development No. of model upgrades
1,000 KWhrs
Machine set up 4 Employees No. of set ups
2 moulding machines
Moulding No. of production runs
9,000 KW hours
Assembly 12 Employees No. of tablets produced
10 Advertisements
Advertising No. of ads placed
3 Employees

Quantity of Activity Drivers TB TS TP Total

No. of model upgrades 10 40 50 100
No. of set ups 10 50 140 200
No. of production runs 60 80 60 200
No. of tablets produced 1,000 600 400 2,000
No. of ads placed 3 4 3 10

Required:

a) Using ABC, calculate the total cost for one TB, TS and TP tablet.

(Final answer for TB = $899)

b) Should Tech implement an ABC system? Provide four (4) case facts to support your answer.
(Note: for the purpose of ACCT2522, we would consider the significance threshold to be 10% of
costs.)

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a) Using ABC, calculate the total cost for one TB, TS and TP tablet.

DO NOT WRITE BEYOND THIS LINE

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b) Should Tech implement an ABC system? Provide four (4) case facts to support your answer.
(Note: for the purpose of ACCT2522, we would consider the significance threshold to be 10% of
costs.)

Decision to implement ABC:

Fact 1:

Fact 2:

Fact 3:

CONTINUE ON THE NEXT PAGE

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Fact 4:

DO NOT WRITE BEYOND THIS LINE

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Question 3: Peter Alexander accused of charging 'plus-size tax' on pyjamas

By Melissa Singer
SMH 11 January 2019

Screen shots show plus-size items at Peter Alexander cost an extra $10 compared to identical items
in regular sizes.

Pyjama brand Peter Alexander has defended charging higher prices for plus-sized garments, citing
"different patterns" in the manufacturing process for larger sizes.

The brand came under fire on social media on Thursday after customers on its website spotted many
plus-sized styles were $10 dearer than their size 8-14 equivalents.

"I am one of the plus-sized customers and agree that it seems unfair to have been charged $10 more
for the navy pj's," Margaret Ingham posted on the brand's Facebook page, which featured many
similar comments.

"You can’t use the argument because you 'use less fabric' [for smaller styles] because if that’s the
case for your smaller sizes you would be charging less per size! Absolute garbage!" wrote Tash Britt.

Some customers queried why the men's range, which is available in seven sizes, had flat pricing,
while the women's range was split into "regular" and "plus-sized" styles, leading some customers to
accuse the brand of charging a "pink" or "fat" tax.

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As of Friday, the website was still showing a price difference between the "PA Plus" range and regular
sizes.

In a statement, Peter Alexander said the plus-sized range used different patterns and the brand
produced smaller runs of each style, which meant prices had to be slightly higher than the regular
range.

"To ensure comfort and that the fit is right, we utilise a different pattern to our regular collection while
still maintaining a beautiful garment," the statement said. "It is these different patterns, along with the
size of the production run and to a lesser extent fabric consumption that impacts the price of the
styles. We try and limit this as much as possible, and as the category and production grows, we hope
to achieve parity across our collections."

Peter Alexander is not the first brand to face a consumer backlash for seemingly charging larger
people more to wear its clothes.

Last year, singer Christina Aguilera was slammed for charging $US5 ($7) more for larger sizes in her
tour merchandise, before the prices were adjusted.

International brands Old Navy and New Look have also been the subject of similar controversies.

Required:

Do you agree that Peter Alexander should charge higher prices for plus-sized prices? In your answer,
consider the reasons provided by Peter Alexander for charging higher prices and explain whether you
agree or disagree with them. (Note: You may want to think of the various costs mentioned and where
they lie in the activity hierarchy.)

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 Self Study Questions (complete in your own time)

Self study question 1

Loki Electronics Ltd is an electronics company that manufactures telecommunications hardware

products. Its operations are divided into three main divisions: Mobile Phone, Landline Phone and
Satellite Phones divisions. Each division manufactures a wide range of product lines. As a result of
the competitive nature of the electronics market, Loki Electronics Ltd provides extensive product-
related after-sales services (eg distribution and after-sales support activities) to its customers.

Loki Electronics Ltd is currently using a conventional product costing system. While manufacturing
overhead costs form only 26% of total manufacturing costs, the majority of the costs are not driven by
the production volume. As a result, Ms Amanda Carter, Loki Ltd’s CFO, is contemplating changing
from the current volume based costing (VBC) system to an Activity Based Costing (ABC) system. As
this is a big change, she has decided to test the concepts of ABC on the Mobile Phone division of Loki
Electronics Ltd.

Loki Electronics Ltd’s Mobile Phone division produces five models of mobile phones. The following
information has been provided for the month of June 2007:

Costing Information

Mobile Phones Models X400 X500 X600 X700 X800 Total

Mobile Phones produced 200 250 400 900 250 2000

Conventional Costing X400 X500 X600 X700 X800 Total

$ $ $ $ $ $
Direct Materials 14,000 17,500 28,000 63,000 17,500 140,000
Direct Labour 16,000 20,000 32,000 72,000 20,000 160,000
Overhead Cost applied * 10,800 13,500 21,600 48,600 13,500 108,000
Total Manufacturing Cost 40,800 51,000 81,600 183,600 51,000 408,000

Cost per phone 204 204 204 204 204

*Overhead = $108,000; allocated on the basis of total units of phones produced

Resource information for Activity Based Costing:

Quantity of
Resources $ Resource Driver Resource
Driver
Salaries 800,000 # Employees 200
Assembly machine depreciation 60,000 # Assembly hours 6000
Testing equipment depreciation 16,000 # Testing hours 2000
Motor Vehicle costs 60,000 # Kilometres travelled 20000
936,000

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The Mobile Phone Division has three main activity pools:

Activities Resources Consumed Activity Drivers

6000 Assembly hours
Assembly setup # Assembly batches
6 Employees
2 Employees
Quality testing # Mobile Phones produced
2000 Testing hours
10000 Kilometres travelled
Distribution & customer support # Distribution batches
4 Employees

Activity Drivers relating to the above activity pools are as follows:

Quantity of Activity Drivers X400 X500 X600 X700 X800 Total

Phones 200 250 400 900 250 2000
Production batches 4 5 2 4 5 20
Distribution batches 2 1 3 1 3 10

Required:

1. Calculate the following:

a. Cost per resource driver
b. Cost per activity pool
c. Cost per activity driver
d. Total cost per unit of each model phone product

Self study question 2

Langfield-Smith Chapter 8: E8.25

Self study question 3

Langfield-Smith Chapter 8: P8.37

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 Solutions to Self Study Question 1

Step 1: Measure cost of Activities

a) Calculate Cost Per Resource Driver
Quantity of Cost Per
Resource Resource Resource
Resources $ Driver Driver Driver
Salaries 800,000 # Employees 200 4,000.00
Assembly machine depreciation 60,000 # Assembly hours 6000 10.00
Testing Equipment Depreciation 16,000 # Testing hours 2000 8.00
Motor Vehicle costs 60,000 # Kilometres 20000 3.00
936,000

b. Calculate Cost per Activity

Cost Per
Resouce Resource Cost Per
Activities Consumption Driver Activity
$ $ $
6000 # Assembly hours 10 60,000
Assembly setup
6 # Employees 4,000 24,000 84,000.00
2 # Employees 4,000 8,000
Quality testing
2000 # Testing hours 8 16,000 24,000.00
10000 # Kilometres 3 30,000
Distribution & customer support
4 # Employees 4,000 16,000 46,000.00

Step 2: Measure cost of Product

c. Calculate Cost per Activity Driver

Cost per
Cost Per Total Activity Drivers Consumed Activity
Activities Activity Driver
$ $
Assembly setup 84,000 # Assembly Batches 20 4,200.00
Quality testing 24,000 # Mobile Phones produced 2000 12.00
Distribution 46,000 # Distribution Batches 10 4,600.00

d. Cost per unit of X400 phone

Cost per
Activity Product
Activities Consumed by X400 Model Driver Costs
$
Overhead Cost
Assembly setup # Assembly Batches 4 4,200.00 16,800.00
Quality testing # Mobile Phones produced 200 12.00 2,400.00
Distribution & customer support # Distribution Batch. 2 4,600.00 9,200.00
28,400.00

Direct Cost 30,000.00

Total Product Cost 58,400.00

Cost per product $292.0000

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 Calculative solutions to self study question 2

Langfield-Smith Chapter 8: E8.25

Note that there is no single correct answer to this exercise. Here are some reasonable solutions.

Cost pool 1:Material- related activity

Raw materials and components $4 425 000
Inspection of finished goods 45 000
Total 4 470 000

Activity driver: raw-material cost or raw material volume

Cost pool 2:Machinery-related activity
Depreciation, machinery $2 100 000
Electricity, machinery 180 000
Equipment maintenance, wages 225 000
Equipment maintenance, parts 45 000
Total $2 550 000

Activity driver: number of units produced or machine hours

Cost pool 3:Setup
Setup wages $60 000
Total $60 000

Cost pool 4:Inspection

Inspection of finished goods $45 000
Total $45 000

Cost driver: number of inspections or length of time spent on inspections

Cost pool 4:Engineering
Engineering design $915 000
Total $915 000

Cost driver: number of parts in a product

Cost pool 5:Facility sustaining activity
Depreciation, plant $ 1 050 000
Insurance, plant 900 000
Electricity, light 90 000
Security wages, plant 60 000

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 Property taxes 180 000
Natural gas, heating 45 000
Total $2 325 000

Cost driver: for costs allocated to support departments, square footage; for costs assigned to
products, number of units produced.

Calculative solutions to self study question 3

Langfield-Smith Chapter 8: E8.37

Requirement 1:
1 Interview salaried client $60 000/8000 $7.50 per interview
Interview business client 75 000/2000 $37.50 per interview
Obtain missing data 600 000/8000 $75 per follow-up call
Input data 120 000/400 000 $0.30 per data entry
Print return 90 000/10 000 $9 per return
Verify return 180 000/6000 $30 per hour
Rectify errors 90 000/6000 $15 per error
Submit return 30 000/10 000 $3 per return

(a) Wage and salary return:

Bill of activities Cost
Interview salaried client 1 $7.50 per interview 7.50
Input data 20 $0.30 per data entry 6.00
Print return 1 $9 per return 9.00
Verify return 22.5 minutes $30 per hour 11.25
Submit return 1 $3 per return ___3.00
36.75
(b) Business tax return:
Bill of activities Cost
Interview business client 1 $37.50 per interview 37.50
Obtain missing data 4 $75 per follow-up call 300.00
Input data 120 0.30 per data entry 36.00
Print return 1 $9 per return 9.00
Verify return 1.5 hours $30 per hour 45.00
Rectify errors 3 $15 per error 45.00
Submit return 1 $3 per return __3.00
475.50

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