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3510 W 2010 MT2 Solutions

# 3510 W 2010 MT2 Solutions - Student name Student ADMS 3510...

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Student name: …………………… Student # .............................. ADMS 3510 Winter 2010: Mid-term #2: Sunday 7 th March 2010: Section: M (Monday 7-10) O (Internet) This is a 2 hour exam; There are 4 equally weighted questions.

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Question1: Gingham Groceries used to allocate all overhead costs in proportion to sales revenue. Recently they introduced an ABC analysis of overhead, and applied it to the management of the stores. Stores sell a wide range of goods, but for analysis these are grouped into three categories: Packaged goods, fresh food and hardware. The budgeted cost driver rates and budgeted activities for January 2010 are as follows: Cost Driver Cost Driver Amount of Cost Driver Rate Packaged Fresh Hardware Goods Food Placing orders: # orders \$50 100 200 25 Deliveries: # deliveries \$75 40 300 25 Stocking shelves: hours \$20 50 500 10 Customer support: # items sold: \$ 0.20 5,000 2,000 500 Required: 1: calculate the total budgeted overhead cost for Gingham Groceries for January. (10 marks) 325 * \$50 = \$16,250 365 * \$75 = 27,375 560 * \$20 = 11,200 7,500 * \$0.20 = 1,500 Total budgeted overhead: \$56,325 2: if Gingham Groceries wanted to reduce their overhead, what areas would they target? (6 marks) i) reduce the area with the largest \$ spending (deliveries); ii) reduce the number of cost driver units (fewer deliveries); iii) reduce the cost per unit (cheaper deliveries). 3: how would Gingham Groceries include the ABC cost information in their financial control system? (4 marks) i) the ABC cost information could be built into their budgeting and cost estimating (making them more accurate); ii) the ABC cost information could be built into their variances enabling tighter budgetary control. 4: in what ways is the ABC cost based system better than their previous method of overhead allocation? (5 marks) ABC costs represent a more detailed model of cost behaviour and therefore permit tighter control of overhead costs and overhead activities.
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