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    Week 4 - Seminar 3 Trimake LTD Recording Version

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    china xi
    1. Trimake Limited uses both traditional costing and activity-based costing (ABC) to calculate the cost per unit of three products. 2. Under traditional costing, overhead is allocated based on machine hours, but ABC allocates overhead based on activities like set-ups, machining, material handling, and inspections. 3. Using ABC, the cost per unit increases for Products X and Y but decreases for Product Z, compared to traditional costing, because of the different allocation methods between the two approaches.

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    Week 4 - Seminar 3 Trimake LTD Recording Version

    Uploaded by

    china xi
    30 views27 pages
    1. Trimake Limited uses both traditional costing and activity-based costing (ABC) to calculate the cost per unit of three products. 2. Under traditional costing, overhead is allocated based on machine hours, but ABC allocates overhead based on activities like set-ups, machining, material handling, and inspections. 3. Using ABC, the cost per unit increases for Products X and Y but decreases for Product Z, compared to traditional costing, because of the different allocation methods between the two approaches.

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    Week 4 - Seminar 3 Trimake Ltd Recording Version

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    1. Trimake Limited uses both traditional costing and activity-based costing (ABC) to calculate the cost per unit of three products. 2. Under traditional costing, overhead is allocated based on machine hours, but ABC allocates overhead based on activities like set-ups, machining, material handling, and inspections. 3. Using ABC, the cost per unit increases for Products X and Y but decreases for Product Z, compared to traditional costing, because of the different allocation methods between the two approaches.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    30 views27 pages

    Week 4 - Seminar 3 Trimake LTD Recording Version

    Uploaded by

    china xi
    1. Trimake Limited uses both traditional costing and activity-based costing (ABC) to calculate the cost per unit of three products. 2. Under traditional costing, overhead is allocated based on machine hours, but ABC allocates overhead based on activities like set-ups, machining, material handling, and inspections. 3. Using ABC, the cost per unit increases for Products X and Y but decreases for Product Z, compared to traditional costing, because of the different allocation methods between the two approaches.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 27

    APC3 STRATEGIC MANAGEMENT

    09 ACCOUNTING WEEK 2
    TRIMAKE LIMITED
    • Traditional method • ABC method
    A. COST PER UNIT FOR EACH PRODUCT USING
    CONVENTIONAL METHODS.

    Product XProduct Y Product Z


    (£) (£) (£)

    Direct Labour @ £6/hour 3 9 6


    Direct Materials 20 12 25
    Production Overhead @
    £28 per Machine Hour 42 28 84
    65 49 115
    B. COST PER UNIT USING ABC PRINCIPLES.

    Five Stage Process STAGE 1


    • Calculate Total Production Overhead.

    STAGE 2
    • Allocate Overhead Costs to Cost Pools.

    STAGE 3
    • Establish Cost Driver Rates.

    STAGE 4
    • Assign Overhead Costs to each Product.

    STAGE 5
    • Recalculate Production Cost per Unit using ABC.
    STEP 1
    Identify costly activities required to complete products. Any process or procedure that
    consumes overhead resources
    In this case :
    set-up cost
    machining
    materials handling
    Inspection
    STEP 2
    Assign overhead costs to the activities identified in step 1
    This step requires that overhead costs associated with each activity be assigned to the
    activity
    In this case:

    Use the percentages to find amounts for each activities


    STEP 3
    Identify the cost driver for each activity
    A cost driver is the action that causes (or “drives”) the costs
    associated with the activity

    Activity Cost driver


    Set up cost Cost set-up cost
    machining Cost per machine hour
    Materials handling Cost per material mvt
    inspection Cost per inspection
    STEP 4
    • Calculate a predetermined overhead rate for each
    activity
    Cost set-up cost Set up costs ÷ # of set ups
    Cost per m/hr machining÷ (machine Unit x Volume
    Cost per material Materials handling÷ # of movements
    of materials
    Cost per Inspection Inspection ÷ number of inspections
    STEP 5
    Allocate overhead costs to products
    TOTAL PRODUCTION OVERHEAD.

    (£)
    Product X 31,500 (750 x £42)
    Product Y 35,000 (1250 x £28)
    Product Z 588,000 (7000 x £84)
    654,500
    ALLOCATION OF OVERHEAD COSTS TO COST POOLS

    (£)
    Set Up Cost 229,075 (35%)
    Machining 130,900 (20%)
    Materials Handling 98,175 (15%)
    Inspection 196,350 (30%)
    654,500
    COST DRIVER RATES

    (£)
    Cost per Set Up 341.903 (229,075/670)
    Cost per Machine Hour 5.60 (130,900/23,375)
    Cost per Material Movement 818.125 (98,175/120)
    Cost per Inspection 196.35 (196,350/1000)
    ASSIGN OVERHEAD COSTS TO EACH PRODUCT

    Product X Product Y Product Z


    (£) (£) (£)
    Set-up cost @ £341.903 25,643 39,319 164,113
    Machining @ £5.60 per
    Machine Hour 6,300 7,000 117,600
    Materials Handling @ £818.125
    Per Movement 9,817 17,181 71,177
    Inspection @ £196.35 per
    Inspection 29,453 35,343 131,554
    71,213 98,843 484,444
    Number of Units 750 1 250 7 000
    Overhead Cost per Unit £95 £79 £69
    PRODUCTION COST PER UNIT USING ABC

    Product X Product Y Product Z


    (£) (£) (£)
    Direct Labour 3 9 6
    Materials 20 12 25
    Production Overhead 95 79 69
    118 100 100

    Change (compared with


    Traditional method) +82% +104% -13%
    REASONS FOR DIFFERENCES IN COSTS

    • Different methods of allocating overheads – Traditional based on machine hours whilst


    ABC is based on set-ups, material movements, machine hours & inspections.
    • Traditional Method – Product X = 4.8%
    Product Y = 5.3%
    Product Z = 89.9%
    • ABC Method - Product X = 10.9%
    Product Y = 15.1%
    Product Z = 74.0%
    • Unit cost therefore higher for Product X & Y and lower for Product Z using ABC
    method of allocating overheads.
    CONVENTIONAL METHOD
    •Supporting Calculations Part a. Trimake
     
    •Direct Labour
     
    •Product X 0.5 hours @ £6/hr = £3

    •Product Y 1.5 hours @ £6/hr = £9


     
    •Product Z 1 hour @ £6/hr = £6
    CONVENTIONAL METHOD
    •Production Overhead
     
    •Production Overheads absorbed on a machine hour basis at a rate of £28 per
    hour :-
     
    •Product X 1.5 hours @ £28/hr = £42
     
    •Product Y 1 hour @ £28/hr = £28
     
    •Product Z 3 hours @ £28/hr = £84
    CALCULATIONS COST DRIVER RATES – TRIMAKE
    •Machine Hours
    • 
    •Calculated using initial information
     
    •Product X 750 units @ 1.5 hours = 1,125
     
    •Product Y 1250 units @ 1 hour = 1,250
     
    •Product Z 7000 units @ 3 hours = 21,000
    _________________
    •Total = 23,375 hours
    ASSIGNING OVERHEAD COSTS TO EACH PRODUCT
    •Set Up Cost
     
    •Product X 75 Set Ups @ £341.903 per Set Up
    = £25,643
     
    •Product Y 115 Set Ups @ £341.903 per Set Up
    = £39,319
     
    •Product Z 480 Set Ups @ £341.903 per Set Up
    = £164,113
    ASSIGNING OVERHEAD COSTS TO EACH PRODUCT
    •Machining Cost
     
    •Product X 1125 Machine Hrs @ £5.60 per Machine Hr
    = £6,300
     
    •Product Y 1250 Machine Hrs @ £5.60 per Machine Hr
    = £7,000
     
    •Product Z 21000 Machine Hrs @ £5.60 per Machine Hr = £117,600
    ASSIGNING OVERHEAD COSTS TO EACH PRODUCT
    •Materials Handling Cost
     
    •Product X 12 Material Movements @ £818.13 per Movement
    = £9.817
     
    •Product Y 21 Material Movements @ £818.13 per Movement
    = £17,181
     
    •Product Z 87 Material Movements @ £818.13 per Movement
    = £71,177
    ASSIGNING OVERHEAD COSTS TO EACH PRODUCT
    •Inspection Cost
     
    •Product X 150 Inspections @ £196.35 per Inspection
    = £29,453
     
    •Product Y 180 Inspections @ £196.35 per Inspection
    = £35,343
     
    •Product Z 670 Inspections @ £196.35 per Inspection
    = £131,554
    COST DRIVER RATES PER UNIT
    •Set up cost = total set up costs
    total # of set ups
    •Machine = total cost of machining
    (machine per unit x Volume units)
    •Materials = total cost
    # of movements of materials
    •Inspection = total cost
    # of inspections
    SUPPORTING CALCULATIONS FOR PERCENTAGE ANALYSIS OF OVERHEADS

    Traditional Method
    •Product X - 31,500 / 654,500 = 4.8%

    •Product Y - 35,000 / 654,500 = 5.3%

    •Product Z - 588,000 / 654,500 = 89.9%


    SUPPORTING CALCULATIONS FOR PERCENTAGE ANALYSIS OF OVERHEADS

    ABC Method
    •Product X - 71,213 / 654,500 = 10.9%

    •Product Y - 98,843 / 654,500 = 15.1%

    •Product Z - 484,444 / 654,500 = 74.0%


    ANY QUESTIONS??

    Next Week:

    Workshop 4 – BIL
    Motor Components Ltd.

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