(Solved):   Question 4   Plain Limited produces two standard products, White and Grey. You have rece ...

Question 4

Plain Limited produces two standard products, White and Grey. You have recently been appointed as a management accountant along with a new marketing manager, who has several ideas about how to grow the company, including introducing new products with different designs.

The company currently absorbs overheads on the basis of units produced, but they have read about a method based on activities undertaken, Activity Based Costing. They have asked you to help them to investigate this method and it’s implication for their business should they decide to implement it in the next accounting year.

The current expected output for the existing products during the next year is White 15,000 and Grey 12,000

The company has also provided the following information about the current overhead costs of the business;

Overhead activity     Annual costs             Cost driver               Amount of activity

                                                                                                          White             Grey

Production                £129,800       Machine hours                   1260                1100

Quality inspection      £58,080       No. of production runs        80                   30

Material purchased    £71,820       Purchase orders                   30                    12

Deliveries to retailers £18,080       Shipments                             20                    12

Required:

1. Produce a statement that shows the overhead split using the original method and showing the amount per unit produced.

[3 marks]

2. Produce a statement showing the overhead split using Activity Based Costing. Show the amount per unit produced.

[8 marks]

3. Explain the difference between the two methods and the difference in cost per unit.

[3 marks]

4. Discuss the advantages and disadvantages of the two methods and the likely outcomes for Payne Ltd if they were to change to the ABC method of overhead allocation.

                                                                                                            [5 marks]

5. Next year the company hope to introduce a new product, the purple variety. Initially the number of sales are expected to be low and they ask you for an indication of how this new product might affect the allocation of overheads to the existing products.

                                                                                                       [6 marks]

                                                         Total: 25 marks