B Sh C Sh D Sh Total Sh Prime cost Short run variable costs sh5 per machine

B sh c sh d sh total sh prime cost short run variable

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B Sh. C Sh. D Sh. Total Sh. Prime cost Short run variable costs @ sh.5 per machine hour Scheduling @ sh.320 per run Set-up @ sh.150 per run Materials handling @ sh.2 per component Total cost Units produced Costs per unit 1,100 250 960 450 400 3,160 25 126.4 2,575 500 1,280 600 250 5,205 25 208.2 11,000 2,500 2,240 1,050 4,000 20,790 250 83.16 25,750 5,000 3,200 1,500 3,000 38,450 250 153.8 40,425 8,250 7,680 3,600 7,650 67,605 Slight difference in total cost due to rounding of figures c) Comparing the results we obtain Products A Sh. B Sh. C Sh. D Sh. Unit cost: conventional Unit cost: ABC Percentage change using ABC 77 126.4 +64% 169 208.2 +23 77 83.16 +8% 169 153.8 -9% It will be seen that ABC charges more overheads to lower volume production and tends to charge relatively less to higher volume production, especially product D in this case. The above example has deliberately been kept simple in order to show the principles of the ABC method.
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MANAGEMENT ACCOUNTING Contact: 0707 737 890 Page 121 REVISION QUESTIONS QUESTION ONE Wangu Manufacturing Company Ltd. is located at the industrial area in Nairobi. The company uses four different machine groups, A, B, C and D in its manufacturing process. The overhead costs budget for the year ending 31 December 2003 is as follows: Sh. ‘000’ Indirect wages Holiday pay and national insurance Supervision Machine maintenance (wages) Supplies Power Tooling costs Insurance of machinery Insurance of buildings Depreciation Rent and rates 12,000 10,200 16,680 14,000 2,600 4,200 13,300 2,520 1,600 10,500 12,400 100,000 At present, overheads are absorbed into the cost of the company’s products by means of a single direct wages percentage of 70 percent. The company wishes to change to machine hour overhead absorption rate for each of its four different machine groups. The following data is available for each of the four machine groups: Machine groups A B C D Total Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Sh. ‘000’ Tooling costs Supervision Supplies Cost of machines Machine maintenance hours Number of direct workers Total number of workers Floor space (square feet) Machine running hours Machine power rating (kilowatts) 5,400 5,170 1,200 32,000 3,000 6 26 3,000 30 55,000 4,100 4,720 800 24,000 2,000 6 34 2,400 60 27,000 2,600 3,630 200 10,000 4,000 2 15 1,600 25 8,000 1,200 3,160 400 18,000 1,000 2 10 1,000 10 15,000 13,300 16,680 2,600 84,000 10,000 16 85 8,000 125 105,000 Required: (a) Machine hour overhead absorption rate for each of the four groups of machines. (b) The overhead cost to be absorbed by product XY123 if:
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MANAGEMENT ACCOUNTING Contact: 0707 737 890 Page 122 (i) It utilizes the following time resources of the indicated machine groups: Hours Machine group 8 3 1 4 A B C D (ii) Direct labour cost is Sh. 22,000,000 and the direct wages percentage method is used. Solution: (a) Computation of Overhead Absorption Rates per Machine Hour Overhead Absorption basis A Sh.’000’ B Sh.’000’ C Sh.’000’ D Sh.’000’ Total Sh.’000’ Indirect wages No. of indirect workers 3,478 4,870 2,261 1,391 12,000 Holiday pay & National Insurance No. of workers (Total) 3,210 4,080 1,800 1,200 10,200 Supervision Actual 5,170 4,720 3,630 3,160 16,680 Machine maintenance (wages) Machine maintenance hours 4,200 2,800 5,600 1,400 14,000 Supplies Actual 1,200 800 200 400 2,600 Power Machine power 2,200 1,080 320 600 4,200 Tooling costs Actual 5,400 4,100 2,600 1,200 13,300 Insurance – Machinery Cost of machines 960 720 300 540 2,520 Insurance – buildings Floor space 600 480 320 200 1,600 Depreciation
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