East Coast Marine Limited

East Coast Marine Limited

Introduction

The accounting concept name “Activity Base Costing” is pretty much defined by its name. Basically, it is a costing system based on activity. It is a system in which costs and staff timing are produced by breaking down every activity into its component parts to assess the amount of work and time involved. It helps in attributing cost to all activities within organization and measures amount of resources required to undertake specific part of work. Therefore, the activity-based accounting is a comprehensive method for determining accurate costs for each and every activity that is involve in manufacturing of particular product whether directly and indirectly. Among costing system the activity based accounting system is relatively recent and widely accepted by organizations worldwide. In order to develop activity-base accounting system, we have to identify the relationship between activities, resources and service and product. Organization used to spend their resources on activities and the product or service is the outcome of these activities (Mandal et.al, 2002).

Organization undertakes many operational activities to manufacture product and use different types of resources in these operational activities. The usage of these resources can be tracked in a way that which product or service consumes what amount of resources. The resources can be identified as direct labour cost or direct material cost. It is a fact that most of the overhead costs are related to the product directly or indirectly. The overhead costs are the organizational resources which are spent on producing final product or these resources are used for facilitating the manufacturing process (Briers & Chua, 2001).

Analysis

East Cost Marine Limited

Question no # 1

Calculation for Material Handling Rate

Departmental Budget for Material Handling

Amount in $

Wages - Payroll

180,000

Employee's Expenses on Cost

36,000

Telephone Bills

38,000

Utilities (other)

22,000

Material & Supplies

6,000

Depreciation Amount

6,000

Total 288,000

 

 

Direct Material Budget

Contracts - Government 2,006,000

Products - Commercial

874,000

Total 2,880,000

Formula Equation

 

Material Handling Rate

Departmental Budget for Material Handling / Direct Material Budget

Material Handling Rate

0.10

East Cost Marine Limited

Question No # 2 Part A

Amount in $

Departmental Material Handling budget (Excluding government contracts cost)

 

 

Wages - Payroll

180,000 (36,000)

 

144,000

Employee's Expenses on Cost

36,000 (7,200)

20%

28,800

Telephone Bills

38,000 (2,800)

 

35,200

Utilities (other)

22,000 22,000

Material & Supplies

6,000 6,000

Depreciation Amount

6,000 6,000

Total 288,000 (46,000)

 

242,000

 

 

 

 

 

Purchase Orders (in numbers)

 

 

 

 

Contracts - Government 80,000

 

 

 

Products - Commercial

156,000

 

 

 

Marketing

1,800

 

 

 

Administration and Finance 2,700

 

 

 

Human resource Expenses

500

 

 

 

Maintenance

1,000

 

 

 

Total 242,000

 

 

 

Formula Equation

 

 

 

Revised Material Handling Costs to be allocated on a per purchase order Basis

Total Material handling cost less government cost/total number of purchase orders

 

 

 

 

$ 1.00

 

 

 

Question no # 2 part B

It has been observed that the usage of purchase order numbers is more reliable and accepted world wide than the dollar amount because of three reasons. First reason is that it helps in distributing cost according to work finished on particular activity. In the given scenario, the cost is distributed among the number of purchase ...