Motor Scooter - Goll makes three types of motor scooters MS 7100. MS6100 and MS9

Question

Motor Scooter - Goll makes three types of motor scooters MS 7100. MS6100 and MS9100. In the past it allocated overhead to products using machine-hours Last year, the company produced 10.000 units of MS7100.17.500 units of MS8100 and 10.000 units of MS9100 and had the following revenues and costs The controller for Motor Scooter - Goll has heard about activity-based costing and pots together an employee team to recommend cost avocation bases The employee team recommends the following: The employee team recommends that plant administration costs not be alocased to products REQUIRED: Using machine-hours to allocate overhead, complete the become statement for Motor Scooter -Goll Do not allocate the plant administrative costs to products Use the same format as the Income Statement given. Complete the income statement using the activity-based costing method suggested by the employee team Use the same format as the Income Statement given. How might the activity-based costing result n better decisions by Motor Scooter - Got! management? After hearing the consultant s recommendations, the CFO decades to adopt act/veriy-based costing but expresses concern about not allocating some of the overhead to the products (plant administration and other fixed overhead) In the CFO's view 'products have to bear a fair share of al overhead or we won t be covering al of our costs. " How would you respond to this comment?

Explanation / Answer

3- Activity based costing gives better results than machine hour basis of overhead allocation because in ABC various overheads are assigned on the basis of various activities on the basis of cost derivers and expenses which are not involved in a particular product would not be allocated and a fair allocation of overheads would be possible and pricing would be done accordingly.

4- according to CFO SOME UNALLOCATED INDIRECT OVERHEAD AND EXPENSES SHOULD ALSO BE INCLUDED IN THE COST OF PRODUCT ON FAIRLY BASIS BECAUSE IF THESE INDIRECT EXPENSES WOULD NOT BE ALLOCATED THEN COST OF THE PRODUCT WOULD BE LOW AND YOU WILL NEED TO CHARGE PROFIT AT FIXED PERCENTAGE BUT IF THESE EXPENSES WOULD BE INCLUDED IN PRODUCT COST THEN COST WOULD BE HIGH AND HIGHER PROFIT MAY BE CHARGED AND HIGHER PRICE WOULD BE FIXED. SO IN ABC INDIRECT EXPENSES WOULD BE ALLOCATED ACCORDING TO SOME COST DERIVERS IN AMONG ALL THE PRODUCTS.

Answer no 1 on the basis of machine hours MS7100 MS8100 MS9100 TOTAL sales 9000000 15000000 13500000 37500000 direct cost direct material 3000000 4500000 3300000 10800000 direct wages 600000 900000 1800000 3300000 variable overheads setting up machines 576000 864000 960000 2400000 processing sales order 432000 648000 720000 1800000 activity cost deriver warehousing 576000 864000 960000 2400000 setting up machines production runs 10 20 20 operatinh machines 288000 432000 480000 1200000 processing sales order sales order received 180 400 220 shipping 216000 324000 360000 900000 warehousing units held in inventory 100 200 100 contribution margin 3312000 6468000 4920000 14700000 operating machines machine hours 6000 9000 10000 25000 plant administration 6000000 shipping units shipped 10000 17500 10000 gross profit 8700000 Answer no 2 on the basis of activity based costing MS7100 MS8100 MS9100 TOTAL sales 9000000 15000000 13500000 37500000 direct cost direct material 3000000 4500000 3300000 10800000 direct wages 600000 900000 1800000 3300000 activity cost deriver variable overheads setting up machines production runs 10 20 20 50 setting up machines 480000 960000 960000 2400000 processing sales order sales order received 180 400 220 800 processing sales order 405000 900000 495000 1800000 warehousing units held in inventory 100 200 100 400 warehousing 600000 1200000 600000 2400000 operating machines machine hours 6000 9000 10000 25000 operatinh machines 288000 432000 480000 1200000 shipping units shipped 10000 17500 10000 37500 shipping 320000 420000 240000 900000 contribution margin 3307000 5688000 5625000 14620000 plant administration 6000000 gross profit 8700000

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