QUESTION 1 40 marks Bamboo Ltd. produces two types of office desks that are clas

Question

QUESTION 1 40 marks Bamboo Ltd. produces two types of office desks that are classified into two types as Executive and Elite desks. The company uses a simple job-costing system that has two direct-cost categories (direct materials and direct labour). Regarding indirect costs, the company uses a single indirect-cost pool of machine hours to allocate the indirect cost. For 2017, Bamboo Ltd estimates its manufacturing overhead costs of $240,000 and 8,000 machine hours. Bamboo collected the following information for 2017. Elite desk 200 desks 10 Number of desks Machine hours per desk Price per desk Cost of materials per desk Direct labour costs per desk Executive desk 300 desks 10 $900 $200 $180 $1,300 $ 300 $ 410 10 marks 5 marks Required: (a) Using the simple costing system, calculate the product cost per unit for the Executive and Elite desk. Assumed Bamboo Ltd. incurred actual total manufacturing costs of $242,000 and 8,000 total machine hours during the year. Determine the amount of under applied or over applied manufacturing overhead for the period and prepare a journal entry to close any balance in the manufacturing overhead account assuming the under over applied overhead amount is insignificant. (c) Bamboo Ltd is concerned about the accuracy of the costs assigned to Executive and Elite desk and therefore is planning to implement an activity-based costing (ABC) system. Bamboo's ABC system would have the same direct-cost categories as its simple costing system. However, instead of a single indirect-cost pool there would now be three categories (design, setup and printing machine operations) for assigning indirect costs. To see how activity-based costing would affect the costs of Executive desk or Elite desk, the following information is collected for an analysis. Activity Costs Cost Allocation Quantity of Cost Allocation Base Base Executive desk Elite desk Design $100,000 Design hours 800 design hours 3,200 design hours Setups 65,000 Number of setups 10 setups 40 setups Machine operations 75,000 Machine hours 3,000 machine hours 2,000 machine hours $240,000 Using the activity based costing system, calculate the estimated product cost per unit for Executive and Elite desk. 16 marks (d) Compare the costs of Executive desk and Elite desk under a simple and an activity based 9 marks costing system. Explain why the simple and activity based costing system differ in the cost of Executive and Elite desk.

Explanation / Answer

Requirement a) Product Cost per unit Executive Desk Elite Desk Cost of Materials per desk 200 300 Direct labor cost per desk 180 410 Manufacturing overhead 300 300 Product Cost per unit 680 1010 Requirement b) There is underapplied overhead of 2000 Date General Journal Debit Credit Cost of goods sold 2000 Manufacturing overhead 2000 Executive Desk Elite Desk Department 2017 OH Cost Cost Driver Total Cost Driver Quantity used OH Cost Per hour to be allocated Cost Driver quantity used OH allocated Cost Driver quantity used OH allocated Design 100000 Design Hours 4000 25.00 800 20000 3200 80000 Setup 65000 Number of Setups 50 1300.00 10 13000 40 52000 Machine Operations 75000 Machine Hours 5000 15.00 3000 45000 2000 30000 Total OH 240000 78000 162000 Manufacturing overhead per unit 260 810 Requirement c) Eastimated product Cost per unit using Activity based costing system. Product Cost per unit Executive Desk Elite Desk Cost of Materials per desk 200 300 Direct labor cost per desk 180 410 Manufacturing overhead 260 810 Product Cost per unit 640 1520 Requirement d) Comparasion of Cost under two systems reveals that cost per unit of executive desk is lower in case of Activity based costing system While Cost of Elite Desk is higher under Activity Based costing system. Both system differ in cost due to rate of application of Manufacturing overhead to Executive desk and Elite Desk. Simple Costing system uses single overhead rate to absorb the overhead while Activity based costing system uses systematic and pragmatic approach to absorb the overhead costs.

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