zammit engineering manufactures a number of components that are sold to the electron 593040
(Contrasting Traditional and ABC Costing) Zammit Engineering manufactures a number of components that are sold to the electronics industry. Most of the manufacturing processes are common to the products, and the direct costs (raw materials and labour) are relatively small in relation to the overhead costs, a consequence of the investment in sophisticated technology to mass-produce large numbers of items.
Zammit Engineering has divided its product range into four product groups: liggles, kicklets, zonnets, and carusos. Each product group is manufactured across three departments: Design, Machining, and Assembly. While design and assembly are labour-intensive, machining is capital-intensive.
Overhead costs have been estimated for each of the cost centres as follows:
|
Design |
Machining |
Assembly & Distribution |
|
|
Overhead costs |
$150,000 |
$250,000 |
$200,000 |
The number of direct labour hours (DLH) available for each department for the same period has been estimated as follows:
|
Design |
Machining |
Assembly & Distribution |
|
|
Direct Labour hours |
10,000 DLH |
12,500 DLH |
20,000 DLH |
The four product groups require direct labour hours in each of the departments as follows:
|
Design DLH |
Machining DLH |
Assembly & Distribution DLH |
Total DLH |
|
|
Liggles |
2,000 |
1,500 |
10,000 |
13,500 |
|
Kicklets |
3,000 |
1,000 |
5,000 |
9,000 |
|
Zonnets |
3,000 |
7,000 |
2,000 |
12,000 |
|
Carttsos |
2,000 |
3,000 |
3,000 |
8,000 |
The Accounting Department recently carried out an activity-based costing exercise that has determined the following cost pool and cost driver information for the business:
|
Cost pool |
Cost driver |
No. of drivers |
|
|
Order entry |
100,000 |
Customer orders |
5,000 |
|
Production |
350,000 |
Production orders |
2,000 |
|
Delivery |
150,000 |
Delivery orders |
5,000 |
Analysis has also shown the number of cost drivers associated with each product:
|
Customer Orders |
Production Orders |
Delivery Orders |
|
|
Liggles |
1,500 |
500 |
1,000 |
|
Kicldets |
500 |
1,000 |
1,000 |
|
Zonnets |
1,000 |
250 |
1,000 |
|
Carusos |
2,000 |
250 |
2,000 |
- Calculate the overhead per direct labour hour using a departmental rate.
- Calculate the total overhead cost allocated to each of the four product groups using the departmental rate.
- Calculate the costs per cost driver under activity-based costing.
- Calculate the total overhead cost allocated to each of the four product groups using activity-based costing.
- Comment on the approaches to costing and the differences between your answers to (b) and (d) above.