ACN 406 CHAPTER 1 ABC.pdf - Chapter 1 Activity Based Costing Example 1 Application of Activity-Based Costing Alex Erwin started Interwood a niche

# ACN 406 CHAPTER 1 ABC.pdf - Chapter 1 Activity Based...

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Chapter 1: Activity Based Costing Example 1: Application of Activity-Based CostingAlex Erwin started Interwood, a niche furniture brand, 10 years ago. He ran the business as a sole proprietorship. While he has 50 skilled carpenters and 5 salespeople on his payroll, he has been taking care of the accounting by himself. Now, he intends to offer 40% of the ownership to public in next couple years and is willing to make changes and has hired you as the management accountant to organize and improve the accounting systems. Interwood's total budgeted manufacturing overheads cost for the current year is Tk.5,404,639 and budgeted total labor hours are 20,000. Alex has been applying traditional costing method during the whole 10 years period and based the pre-determined overhead rate on total labor hours. Interwood's sofa range includes the 2-set, 3-set and 6-set options. Platinum Interiors recently placed an order for 150 units of the 6-set type. The order is expected to be delivered in one-month time. Since it is a customized order, Platinum will be billed at cost plus 25%. You are not a fan of traditional product costing systems. You believe that the benefits of activity-based costing system exceeds its costs, so you sat down with Aaron Mason, the chief engineer, to identify the activities which the firm undertakes in its sofa division. Next, you calculated the total cost that goes into each activity, identified the cost driver that is most relevant to each activity and calculated the activity rate. The results are summarized below: Activity A (in Tk.) Relevant Cost Driver B C=A/B (in Tk.) Production of components 2,313,132 Machine hours 25,000 Assembly of components 1,231,312 Number of labor hours 20,000 62 Packaging 213,123 Units 5,000 Shipping 231,230 Units 5,000 Setup costs 34,243 Number of setups 240 143 Designing 123,132 Designer hours 1,000 Product testing 24,234 Testing hours 500 Rent 1,234,233 Labor cost \$1,645,644 Once the order was ready for packaging, Aaron gave you a summary of total cost incurred, and a statement of activities performed (also called the bill of activities) as shown below: Order No: 15X2020 Customer: Platinum Interiors Units: 150 Type: 6 unit Amounts in Tk. Cost of direct materials 25,000 Cost of purchased components 35,000 Labor cost 15,600 93 43 46 123 48 75%
Activity Relevant Cost Driver Activity Usage Production of components Machine hours 320 Assembly of components Number of labor hours 250 Packaging Units 150 Shipping Units 150 Setup costs Number of setups 15 Designing Designer hours 70 Product Testing Testing hours 22 Rent Labor cost 4500