Accounting

Footprint Ltd. is a shoe manufacturer in Aberdeen, which produces regularly three types of shoes: Casual shoes, trainers and boots. Considering a normal production, the details of a period of production for each one these products are as follows.

Product Machine hours per unit Materials per unit (£) Volume unit
Casual shoes 1 25 650
Trainers 2 17 1,100
Boots 4 30 5,000

Currently, the company uses traditional costing system to calculate costs per unit. The overheads are allocated on machine hour basis, using a rate per machine hour equivalent to £35. Direct labour per hour costs £17.

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The business is planning an expansion abroad and so, the unit costs of each product will be extremely relevant to a market research. You recently arrived as a management accountant in this business. After looking at the cost for each product, you realised that overhead costs are very significant and you are concerned that the company would miss opportunities to export the range of products if the costs are not allocated properly.

You decided to visit the factory floor to understand in details the production process. During your visit, you identified relevant cost pools along the manufacturing process. You estimated that each of these cost pools consumed differently overhead costs. You calculate an approximate distribution of overheads as follows.

%

Cost relating to maintenance
Costs relating to machinery
Costs related to purchasing
Cost relating to quality control
Total production overheads

You also realised that the three different products consumed differently the resources provided by the above-mentioned cost pools. You did an extensive observation of the production process. After checking the information you collected, you found the cost driver to each cost pool and how much each product consumed from them.

Product

Number of purchase orders

Number of quality inspections

Casual shoes

15

170

Trainers

20

125

Boots

65

550

Total

100

845

You learned in Management Accounting 2 module that the product unit costs could vary depending on the overhead allocation. You were very interested on Activity Based costing you think this system could help to provide a more accurate data on cost per unit. You feel that you can help managers to take a more informed decision on the business expansion if you compute the costs using Activity-Based costing.

1.
a) Calculate the unit costs (showing your calculations for direct labour, direct materials and overheads) for each product (casual shoes, trainers and boots).
b) Compute the total overheads for the period per product.
2.
a) Compute the total of machine hours for the period.
b) Calculate the amount of manufacturing overhead per each cost pool and the overhead rate per each cost driver.
3.
a) Compute the difference of unit costs between the two above mentioned costing systems and for each product (casual shoes, trainers and boots).
b) Calculate the total overheads per unit and for the period allocated to each product using the two above mentioned costing systems.
c) Briefly explain the impact of the treatment of manufacturing overheads on the differences between the unit overhead and total overhead costs for the period.
4.
a) Discuss whether machine hours are the appropriate basis for assigning manufacturing overhead to the company’s range of products (casual shoes, trainers and boots).
b) Use your calculations from tasks 1-3 to help identify and explain the key drivers of manufacturing overhead at the company. Recommend which costing system to apply.
c) Identify and briefly discuss three advantages of using ABC.
d) Identify and briefly discuss three disadvantages of using ABC.

 

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