Q & A - Sept 2018 - ABC

Sept 2018 – ABC
Q3. (a) The Stanley Jobs Company produces three products: Panadols, Breacols, and
Lozenges. The company uses a normal cost system and overhead costs are
currently charged to products using a plant-wide overhead rate based on
machine hours. Because of considerable differences in the support cost needs of
each product, it is probably advisable that the company switch to an activity-
based costing system to charge overhead to products.
The company expects to produce 1,000 Panadols, 3,400 Breacols, and 600
Lozenges in fiscal year 2018. Each Panadol requires 20 direct labor hours and 43
machine hours, Breacol require 50 direct labor hours and 30 machine hours, and
Lozenges require 80 direct labor hours and 25 machine hours. The total direct
labor hours and total machine hours the company expects to operate next year
are 238,000 direct labor hours and 160,000 machine hours.
Below is the budgeted overhead data for the year 2018:
Machine Engineering Inspections Total

setups changes & packaging overheads
In value (RM) 170,000 320,000 470,000 960,000

Activity level 34 setups 400 Eng. Chgs. 5,000 units
Based on an analysis of the three overhead activities, it was estimated that the
three products would require these activities as follows in fiscal year 2018:
Panadols Breacols Lozenges Total

Machine setups 5 setups 9 setups 20 setups 34 setups
Engineering changes 140 chgs 8 chgs 252 chgs 400 chgs
Inspection & packaging 1,000 units 3,400 units 600 units 5,000
units
*All units of each product are individually inspected and packed.
The direct material and direct labor costs included in the three products are as
follows:
Panadols Breacols Lozenges

RM
Direct material 680 300 730
Direct labor 900 560 850
Required:
(i) Compute the cost per unit of each product by using a plant-wide overhead
rate based on machine hours. (9 marks)
(ii) Calculate the total cost and cost per unit for the three products by using
an activity-based costing system. (11 marks)
(b) For many organizations, the thought of rebuilding the company budget from the
ground up can be nightmare inducing. Wiping the financial slate clean and
starting from scratch would be a last resort in a worst-case scenario, never an
option to be considered under normal circumstances. Yet starting around 2008,
an increasing number of organizations chose to do exactly that. Faced with an
economic recession, both public and private corporations began to turn towards
an extreme method of budgeting known as “Zero-Based Budgeting,” or ZBB.
Required:
Briefly explain the definition of Zero Based Budgeting or ZBB including the
stages to implement it and the packages that been offered under ZBB. You may
use example to illustrate your answer. (10 marks)
[Total: 30 marks]
Answers
(i) Calculate the cost per unit of each product by using a plant-wide overhead rate
based on machine hours.
The Cost of Each Product Using a Plant-Wide Rate Based On Machine Hours:
Calculation of plant-wide overhead rate:
Total budgeted machine hours =

1,000 Panadols x 43 MH per unit + 3,400 Breacols x 30 MH per unit + 600
Lozengess x 25 MH/unit = 160,000 MH
Plant-wide Overhead Rate = Total Budgeted Overhead Dollars/Total Budgeted

Machine Hours
= RM960,000/ 160,000 machine hours = RM6.00 per MH
Calculation of each product’s cost using a plant-wide overhead rate:

Direct material 680 300 730
Direct labor 900 560 850
Overhead 258 180 150
Total cost 1,838 1,040 1,730
*43MH X RM6 = RM258; 30MH X RM6 = RM180; 25MH X RM6 = RM150
(ii) Calculate the total costs and cost per unit for the three products by using an activity-
based costing system.
The Activity Cost Rates for Setups, Material Handling and Packaging and
Shipping:
Activity Budgeted OH Est. Volume Cost per activity

level
Machine setup RM170,000 34 setups RM5,000 per setup
Engineering changes RM320,000 400 changes RM800 per changes
Inspection & packaging RM470,000 5,000 units RM94 per unit
Cost of The Three Products Using an Activity-Based Costing System:

1,000 units 3,400 units 600 units
RM
Direct material√ 680,000 1,020,000 438,000
Direct labor√ 900,000 1,904,000 510,000
Manufacturing OH
Machine setup 25,000 45,000 100,000
Engineering changes 112,000 6,400 201,600
Inspecting & packing 94,000 319,600 56,400
Total cost 1,811,000 3,295,000 1,306,000
Cost per unit 1,811 969.12 2,176.66
Workings:
Machine Setups:
5 setups @ $5,000 per setup = $ 25,000
9 setups @ $5,000 per setup = $ 45,000
20 setups @ $5,000 per setup = $100,000
Engineering Changes:
140 changes @ $800 per change = $112,000
8 changes @ $800 per change = $ 6,400
252 changes @ $800 per change = $201,600
Inspecting & Packing:

1,000 units @ $94 per unit = $ 94,000
3,400 units @ $94 per unit = $319,600
600 units @ $94 per unit = $ 56,400
Part B: (10 marks)
(b) Briefly explain the definition of Zero Based Budgeting or ZBB including the
stages to implement it and the packages that been offered under ZBB. You may
use example to illustrate your answer.
In a ZBB system all activities are justified and prioritised before decisions about
the allocation of funds are made. ZBB focuses on programmes or activities
instead of functional departments based on line items as with traditional
budgets. Funds are allocated on the basis of a cost-benefit analysis. ZBB
questions long standing agreements and assumptions.
There are three main stages involved in the introduction of ZBB:

I. A description of each organisational activity in a decision
package
II. The evaluation and ranking of decision packages in order of
priority
III. Allocation of resources based on order of priority up to the
spending cut-off level.
Decision packages are identified for each decision unit. Decision units
represent separate programmes or group of activities that an organisation
undertakes. A decision package represents the operation of a particular
programme with incremental packages reflecting different levels of effort
that may be expended on a specific function. One package is usually
prepared at the ‘base’ level for each programme. This package represents
the minimum level of service or support consistent with the organisation’s
objectives. Service or support higher than the base level is described in
one or more incremental packages. For example, managers might be asked
to specify the base package in terms of level of service that can be
provided at 70 per cent of the current cost level and incremental packages
identify higher activity or cost levels.
Once the decision packages have been completed, management is ready

to start to review the process. To determine how much to spend and where
to spend it, management will rank all packages in order of decreasing
benefits to the organisation. Theoretically, once management has set the
budgeted level of spending, the packages should be accepted down to the
spending level based on cost-benefit principles.

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Sept 2018 – ABC

Below is the budgeted overhead data for the year 2018:

Machine Engineering Inspections Total

In value (RM) 170,000 320,000 470,000 960,000

Panadols Breacols Lozenges Total

*All units of each product are individually inspected and packed.

Panadols Breacols Lozenges

Calculation of plant-wide overhead rate:

Total budgeted machine hours =

Plant-wide Overhead Rate = Total Budgeted Overhead Dollars/Total Budgeted

= RM960,000/ 160,000 machine hours = RM6.00 per MH

Calculation of each product’s cost using a plant-wide overhead rate:

Panadols Breacols Lozenges

*43MH X RM6 = RM258; 30MH X RM6 = RM180; 25MH X RM6 = RM150

Activity Budgeted OH Est. Volume Cost per activity

Panadols Breacols Lozenges

Inspecting & Packing:

Part B: (10 marks)

There are three main stages involved in the introduction of ZBB:

Once the decision packages have been completed, management is ready

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