Session 10 ABC Problem

Session 10 ABC Problem - Acct 102 Summer 2009 ABC System...

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Acct 102 Summer 2009 ABC System Practice Problem The CEO of Coffee Cups and Tea Bags Company (CCTB) is determined to produce the best coffees and teas. He learnt about activity-based costing (ABC) systems from an accounting seminar that he attended. He realized that using traditional product cost systems sometimes lead to misleading cost figures that could undermine a company’s performance. Looking at the performance report of its coffee division for the last financial year (2002), he noted that the division barely broke even. This is surprising as their products have been well received by the market. The CEO wondered if a more sophisticated cost system could help to explain the division’s poor performance. He thus directed his division head to implement an ABC cost system for the coffee division. The division head of CCTB coffee division, Mr. Kafee Black, an avid coffee drinker, had been thinking of how best to carry out his boss’s orders. In the end, Mr. Black decided to engage an external consultancy firm to set up an ABC costing system. He chose Wharton Consultants who are really good in management accounting and offer value-for-money consulting advice. As a young and bright Wharton consultant, you have recently graduated last year with double degrees, double majors and are earning double what your peers are earning. To implement an ABC system, you first obtained your client’s financial statements. Note: 1 kilogram (kg) = 1000 grams (g) Coffee Cups and Tea Bags (CCTB) – Coffee Division Income statement for the year ended 2002 Coffee Sense Cocoa Fusion Brown Coffee Total Sales $4,320,000 $4,000,000 $8,800,000 $17,120,000 Less: Cost of goods sold Direct Material $1,920,000 $1,850,000 $1,600,000 $5,370,000 Direct Labor $96,000 $165,000 $420,000 $681,000 Overheads $1,536,000 $2,640,000 $6,720,000 $10,896,000 Gross margin $768,000 ($655,000) $60,000 $173,000 Note: (1) Direct materials pertain to the purchasing cost of coffee beans and cocoa powder used. (2) Direct labor is the total cost of the direct man-hours hours of the production workers. The direct labor costs for each kilogram-bag of Cocoa Fusion is more than 1.5 times that of the other two products as Cocoa Fusion takes longer to produce than Coffee Fusion and Brown Coffee . (3) Total overhead costs are allocated to the three products based on direct labor hours. The manufacturing overhead rate for 2002 was $240/DLH. To better understand the business, you relentlessly conducted numerous interviews with other operational
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Session 10 ABC Problem - Acct 102 Summer 2009 ABC System...

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