4. Berodua pic assembles three types of motorcar at the same factory: the 600cc

Question

4. Berodua pic assembles three types of motorcar at the same factory: the 600cc Mira the 1000cc Kelira and the 1300cc Mighty. It sells the motorcars throughout the ome country Historically, the company has allocated all overhead costs using total machine hours but is now considering introducing Activity Based Costing (ABC). Berodua ple's accountant has produced the following analysis. Selling price($ Raw material Annual output (units) Annual direct labour hours 1 10,000 90,000 280,000 cost per unit) 2.500 3,600 per unit) 25,000 30,000 50,000 Mira2,500 Kelira 1,800 Mighty -4,000 The cost drivers that generate overheads are: Deliveries to distributors-the number of deliveries of motorcars to distributors showrooms. Set-ups - the number of times the assembly line process is re-set to accommodate a production run of a different type of motorcar Purchase orders-the number of purchase orders. Spare parts-the number of spare parts The annual cost driver volumes relating to each activity and for each type of motorcar are as follows Number of deliveries Number of Number of Number Number to distributors set ups purchase orders of spare o parts machine hours 100 90 180 370 Mira Kelira 40 35 70450 7,000 250,000 300 4.000 150,000 250| 2,500| 80,000 Total The annual overhead costs relating to these activities are as follows: 1,000 13,500 480,000 145 $ 7.400,000 $ 8,000,000 $ 5,600,000 $ 3,000,000 $4,800,000 $ 28,800,000 Deliveries to distributors Set-up costs Purchase orders Spare parts Machine time Total All direct labour is paid at $5 per hour. The company holds no stocks

Explanation / Answer

(a) Computation of total profit based on overheads allocated on machine hours -

(b) Computation of total profit based on overheads allocated on activity based -

Please comment in case of further clarification required/wrong answer.

Mira Kelira Mighty Total Annual output (units) 2500 1800 4000 No. of machine hours 150000 80000 250000 Selling price per unit 25000 30000 50000 Raw material cost per unit 2500 3600 6000 annuall direct labour hours @5/hours 110000 90000 280000 Sales value 62500000 54000000 200000000 316500000 Costs components: Raw material cost 6250000 6480000 24000000 36730000 Direct labor cost 550000 450000 1400000 2400000 Deliveries to Distribution 2312500 1233333 3854166.7 7400000 Setup costs 2500000 1333333 4166666.7 8000000 purcahse orders 1750000 933333.3 2916666.7 5600000 spareparts 937500 500000 1562500 3000000 Machine time 1500000 800000 2500000 4800000 Total cost 15800000 11730000 40400000 67930000 Net income(sales value - total cost) 46700000 42270000 159600000 248570000

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