QUESTION 2 

Instructions (for Q2 only) :

(i) Based on the following case study information, build a spreadsheet model using Excel 2003 (or later) to answer the accompanying problems.

(ii) The spreadsheet model should include a "Data Input Section" (whereby all raw / original data from the case should be entered), "Additional Information Section" (whereby other relevant information for the individual problems should be entered) and an "Output Section" (whereby the final answers to each problem is presented).

(iii) Program your spreadsheet to perform all necessary calculations. Do not "hard code" any amounts, use the addition, subtraction, multiplication, division operations or any other specialised formulas.

(iv) Print a copy of the spreadsheet with the answers / results to the problems.

(v) Print a copy of the spreadsheet showing the formulas used therein.

Note : Please submit a copy of your CD with your Excel file.

Case study information :

Timmy Inc. produces 2 types of products, "Ronny" and "Sonny". It expects to produce 70,000 units of Ronny and 60,000 units of Sonny. Total direct material cost in 2015 is expected to be $55.00 per unit for Ronny and $100.00 per unit for Sonny.

Timmy expects to pay wages of $20.00 per direct labour hour. Ronny requires 2 direct labour hours per unit, whilst Sonny requires 1 direct labour hours per unit to complete. Other manufacturing costs are considered as overhead. The estimated total annual overhead for the year is $3,500,000. Currently, Timmy allocates its overheads based on direct labour hours.

The company is considering the use of activity-based costing (ABC) system to allocate all its overheads based on the following information :

Moulding

(Machine hours)

Quality control

(No of inspections)

Shipping

(No of customer orders)

Ronny

36,000

20

500

Sonny

44,000

30

1,500

Timmy estimates that Moulding related costs amounts to $2,800,000; Quality control related costs amounts to $150,000; and Shipping related costs amounts to $550,000.

Required :

(a) Calculate the total cost of each product (assuming that the expected no. of units are produced) using the traditional costing system.

(b) Calculate the total cost of each product (assuming that the expected no. of units are produced) using the activity-based costing system.

(c) Suppose the company decides to use ABC to set their selling price. What would be the minimum selling price per unit for each product if the company requires a gross profit margin of 45% for all products?

(d) Assume that Moulding cost increased by 20% and Shipping cost decreased by $150,000. Calculate the total cost of Ronny only (assuming that the expected no. of units are produced and the total driver units remains the same) using the activity-based costing system.

(e) Distinguish between an activity's "trigger" and its root cause (give an example of each). The product line manager commented "Although in the past this product has been very profitable, based in our recent reports, it appears that we might need to drop this product", with reference to this statement, explain why a new product costing system might be required. There are many challenges when implementing ABC / ABM. Human behaviour is one such challenge. Explain why human behaviour might affect the successful implementation of ABC / ABM. (Word limit : 500). (7 marks)

QUESTION 3

Starwalker Ltd. manufactures 2 joint products. Both products require additional processing beyond the split-off point. Litesaber sells for $35 per unit and Megasbaer sells for $50 per unit.

There were no opening inventories at 1 Nov 2015. The following information relates to the month of Nov :

Litesaber

Megasaber

Production (units)

120,000

80,000

Additional processing costs

$800,000

$500,000

Total joint processing costs for Nov were $2,800,000. The ending finished goods as at 30 Nov 2015 amounted to 30,000 units of Litesaber and 15,000 units of Megasaber.

Required :

(a) Determine the cost of the ending finished goods of each of the products as at 30 Nov 2015 using the physical method. (1 mark)

(b) Determine the cost of the ending finished goods of each of the products as at 30 Nov 2015 using the net realisable value method. (3 marks)

(c) Determine the cost of the ending finished goods of each of the products as at 30 Nov 2015 using the constant gross margin method. (2 marks)

(d) Starwalker is considering to further process "Litesaber" into "Nanosaber" at the additional cost of $8.00 per unit. "Nanosaber" could be sold at $45.00 per unit. Should the company produce "Nanosaber"? Show the necessary computation to justify your decision.