ASSESSMENT - 2

Assessment 2 - Major Assignment



Assessment 2 - Major Assignment

Part A:

1. Case Study

Use traditional process costing to allocate the direct materials and conversion costs per department to total bolts produced. Develop a cost per bolt for each type of fabric.

Input Area

 

Denim

Lightweight cotton

Heavyweight cotton

Total

Direct Cost

 

 

Direct Material

$8,000

$2,400

$20,000

$52,000

Direct Labour Cost

$660

$1,320

$920

$2,900

 

 

 

Overhead Costs

 

 

Machine

 

$40,000

Setup

 

$11,000

Inspection

 

$6,996

Total Overhead

 

$57,996

 

 

 

Volume

 

 

Units

1000

4000

2000

7000

Direct Labour Hours

33

66

46

145

Machine Hours

500

1400

1500

3400

Number of set-ups

10

25

20

55

Inspection hours

80

340

170

590

Note: As there is no beginning or ending inventories, equivalent units are equal to physical units. There is also no need for the calculation of the conversion cost per unit separately for the two departments due to the conversion cost are allocated in both departments to the number of bolts produced. With no beginning or ending inventories, the number of bolts produced is identical in the two departments (Hughes A., 2005).

Traditional Process Costing

 

 

Equivalent conversion cost

 

Total Conversion Costs to Accounts For

Total

Direct Labour

$2,900

Overhead

$57,996

Total

$60,896

 

Total Units (Bolts) to Account for

7,000

 

Equivalent Conversion Cost per unit

 

 

 

$8.70

Process Cost Report

 

Denim

Light weight cotton

Heavy weight cotton

Total

Number of Bolts

1,000 4,000 2,000 7,000

 

 

 

Direct Materials

$8,000

$24,000

$20,000

$52,000

Conversion Costs

$8,699

$34,798

$17,399

$60,896

Total Costs accounted for

$16,699

$58,798

$37,399

$112,896

 

Summary Of Cost Per Unit

 

 

Direct Materials

$8.00

$6.00

$10.00

 

Conversion Costs

$8.70

$8.70

$8.70

 

Total

$16.70

$14.70

$18.70

 

Using activity based costing, develop a cost per bolt

The following is the cost per bolt through the method of activity based costing:

 

Denim

Light weight cotton

Heavy weight cotton

Process Costing

$16.70

$14.70

$18.70

Activity-Based Costing

17.49

12.7

22.29

 

Cost Per Bolt Overstated (Understated by Traditional Process Costing)

($0.79)

$2.00

($3.59)

2. Comparison of Activity based costing and Process costing

Using Process cost method, the lightweight cotton per bolt cost was overstated. This cost can absorb costs that were incurred by the other types of fabric. This is due to the cost which incurred in process costing is first to the department and then to the product. The volume of production of light weight cotton that was 4, 000 bolts was much larger than the Denim that was 1, 000 bolts and heavy weight cotton which was 2, 000 bolts. However, as conversion cost allocation is based on the number of units instead of flow of resources which were used, hence, it is obvious that product which has more units will have comparatively more cost.

Light weight cotton production comprises of proportionally lesser set-ups than the other two products. Hence, the less cost will be allocated to the product and department. Few machines hours has also been used by Light-weight cotton so the cost of machine hours allocated to this product will be less. Additionally, the cost of direct labour used by Light weight cotton per bolt is less than the other two products. In the traditional process costing method, the two costs, direct labour and other conversion cost is allocated to the units' with no consideration to the actual labour that has been used (Duh, R., Lin, T. W., et al., 2009).

Furthermore, for management of Arafura Mills it might be useful to investigate the cost of machine set-up and try to reduce it, or decrease the set-ups numbers which ...