1 of 3 Leo1151: Introduction to Management Accounting Seminar6 P8-7 ABC vs tradi

Question

1 of 3 Leo1151: Introduction to Management Accounting Seminar6 P8-7 ABC vs traditional overhead Time allowed: 30 minutes The management of Vegetarian Meals Ltd, who make three main product lines of ready-made vegetarian meals in batches for the restaurant trade, are reviewing the cost accounting policy in relation to overheads. Currently the company absorbs overheads on the basis of direct labour hours. Some of the management board feel that the company should switch to activity- based costing (ABC), as the product lines make different demands on the company's overhead resources -in particular, Mexican Beanfeast requires a lot of advance soaking of a wide variety of raw beans and pulses, peeling and preparation and so on. You have been asked to demonstrate the difference between the existing and the proposed method of dealing with overheads. The following information is available to assist you Mexican Bean Eastern Mazerial E12 per ko) our (€9 per hour) Machine hours per unit e18.00 18.00 12 minutis E36.00 24.00 6minute 6minne Units per batch Sales prioe Sales demand Overhead cots Machine related Quality teeing Machine set-up costs Material movements 663.00 58.00 660.00 3,200 3,600 4,500 74,500 17,145 654 825 660,000 driven by machine hour driven by number of unis driven by number of banches driven by number of ilos Calculate the profit or loss on each product using traditional overhead recovery (plantwide rate using direct labour hours as a base) and assuming normal absorption a. b. Calculate the profit or loss on each product using ABC overhead recovery and normal absorption costing. Give your recommendation and explain your reasons. e.

Explanation / Answer

Traditional Costing Cost Mexican Bean Feast Italian Veg Pizza Middle Eastern Sale 201600 208800 270000 Material 115200 64800 86400 Labour 28800 64800 48600 Machine Related (40:120:90) 11920 35760 26820 Quality Testing(40:120:90) 2743.2 8229.6 6172.2 Machine setup cost(40:120:90) 8772 26316 19737 Material Movemets(40:120:90) 9600 28800 21600 Net Profit 24564.8 -19905.6 60670.8 ABC Costing Cost Mexican Bean Feast Italian Veg Pizza Middle Eastern Sale 201600 208800 270000 Material 115200 64800 86400 Labour 28800 64800 48600 Machine Related (192:432:270) 16000 36000 22500 Quality Testing(32:36:45) 4855.22 5462.12 6827.65 Machine setup cost(80:60:75) 20400 15300 19125 Material Movemets(96:54:90)) 24000 13500 22500 Net Profit -7655.22 8937.88 64047.35 Total Profit as per tradional 65330 Total Profit as per ABC 65330

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