AO2 - REVISION WORKSHOP - Questions - AO2 REVISION WORKSHOP...

AO2 – REVISION WORKSHOP
QUESTION 1
COACH POTATO (Pty) Ltd manufactures two television models, the YESTERDAY-
model which has been produced for 10 years and sells for R910 and the
TOMORROW-model which was introduced in early 2012 and sells for R1 160.
Based on the following income statement for 2012, a decision has been made to
concentrate marketing resources on the TOMORROW-model and to begin to
phase out the YESTERDAY-model.
Income statement for the year ended 31 December 2012
TOMORROW
R
YESTERDAY
R
Sales 4 640 000 20 020 000
Cost of sales 3 232 000 13 024 000
Gross margin 1 408 000 6 996 000
Selling and admin expenses 980 000 5 700 000
Net profit 428 000 1 296 000
Units produced and sold 4 000 22 000
Net profit per unit R107 R58.91
Unit costs are as follows:
TOMORROW
R
YESTERDAY
R
Direct material 655 363
Direct labour 3.5 hours x R14 = 49 1.5 hours x R14 = 21
Manufacturing overhead* 104 208
Total 808 592
* Manufacturing overhead was applied on the basis of machine hours at a
predetermined rate of R26 per hour.
The company’s financial manager, Ms Holiday is advocating the use of activity-
based-costing and has gathered the following information about the company’s
overhead costs for 2012:
Activities Activity
costs
(R)
Activity driver Total
activity
Total
activity -
TOMORRO
W
Total
activity –
YESTERDA
Y
Soldering 880 000 Number of
solder points
1 600
000
400 000 1 200 000
Shipments 836 000 Number of
shipments
19 000 3 800 15 200
Quality control 1 170 000 Number of
inspections
78 000 21 060 56 940
Purchase
orders
1 110 000 Number of
orders
185 000 105 450 79 550
Machine
power
47 500 Machine hours 190 000 15 200 174 800

Machine set-
ups
948 500 Number of
setups
9 485 4 500 4 985
Total 4 992
000
Source: Adapted from Management Accounting by Correia, Langfield-Smith, Thorne & Hilton.
REQUIRED:
1.1 Explain each of the four stages involved in designing an activity based
costing system.
1.2 Calculate the total production cost for both models using activity
based costing to apply overheads.
1.3 Advise management on whether they should continue to phase out
the YESTERDAY-model and emphasise the TOMORROW-model, based
on activity based costing.