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PLEASE GUIDE ME WITH WHAT WORKINGS SHOULD BE DONE SO THAT I CAN WORK THIS QUESTION, help urgently needed!
Assume that you are given the following information about a company that makes compact discs and LP records.
Compact Discs Records
Monthly production 15,000 5,000
Direct material costs
Pressing dept ?5.00 ?6.00
Cutting dept ?5.00 ?7.00
Packing dept ?3.00 ?13.00 ?2.00 ?15.00
Direct labour ?5.00 ?7.00
Machine hours
Pressing dept 0.6 0.5
Cutting dept 0.6 0.5
Packing dept 0.5 0.3
In addition, the following overheads are incurred:
? Basis of apportionment
Production department overheads
Pressing dept 25,000
Cutting dept 30,000
Packing dept 16,000
Service department overheads
Purchasing 7,000 Direct material costs
Production control 5,000 Direct material costs
Set-up costs 12,000 Direct material costs
Maintenance 3,000 Machine hours
Quality control 4,000 Machine hoursRequired:
(a) The company wishes to introduce a pricing system which is 20% mark-up on marginal cost. Calculate the price it should charge for compact discs and records. Outline the disadvantages associated with this approach.
(b) The company decides to charge 15% full cost (absorption basis). What will the new price be for the compact discs and records? Outline the disadvantages of the absorption absorption approach in this case.
(c) The company decided to continue charging 15% on full cost, but this time they use activity-based costing rather than the conventional absorption approach. Show the new pricing policy and outline the advantages and disadvantages of the new approach.
You may find the following information helpful:
Activity Cost Driver
Purchasing Number of orders
Production control Number of components produced
Too setting Number of tool changes
Maintenance Machine hours
Quality control Number of components inspected
Pressing Dept Machine hours
Cutting Dept Machine hours
Packing Dept Machine hoursCost driver Compact discs Records Total
Number of orders 200 2,000 2,200
Number of components produced 12,000 50,000 62,000
Number of tool changes 100 200 300
Machine hours 6,000 15,000 21,000
Number of components inspected 4,000 13,000 17,000
Total 22,300 80,200 102,500You cannot expect a full answer on here. This forum is to get help on specific problems – not to get answers to full questions.
Surely the book in which you found this question also contains an answer???
You should watch the free lecture on activity based costing. That should enable you to be able to the question (because it is a very standard ABC question).
Marginal cost means variable cost. So for each of the two products add up all the variable costs (ignore the production departments and service department overheads) and then add on 20%.
Unless this is homework, there is not much point in studying from a book that does not have answers! You really should get a Revision Kit from one of the ACCA approved publishers.
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