SOLUTIONS 2
1
Management Accounting
CIPFA
77 Mansell Street
London E1 8AN
+ 44 (0)20 75435600
Email: CustomerServices@cipfa.org
Website: www.cipfa.org.uk
Every possible care has been taken in the preparation of this publication but no
responsibility can be accepted for loss occasioned to any person acting or
refraining from action as a result of any material contained herein.
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2: Cost behaviour and cost accounting techniques
Table of contents
Exercise Solution 2.1 ................................................................. 4
Exercise Solution 2.2 ................................................................. 6
Exercise Solution 2.3 ................................................................. 7
Exercise Solution 2.4 ............................................................... 10
Exercise Solution 2.5 ............................................................... 11
Exercise Solution 2.6 ............................................................... 13
Exercise Solution 2.7 ............................................................... 16
Exercise Solution 2.8 ............................................................... 17
Exercise Solution 2.9 ............................................................... 18
Exercise Solution 2.10 ............................................................. 20
Exercise Solution 2.11 ............................................................. 21
Exercise Solution 2.12 ............................................................. 24
Exercise Solution 2.13 ............................................................. 25
Exercise Solution 2.14 ............................................................. 27
Exercise Solution 2.15 ............................................................. 29
Exercise Solution 2.16 ............................................................. 31
Exercise Solution 2.17 ............................................................. 32
Exercise Solution 2.18 ............................................................. 35
Exercise Solution 2.19 ............................................................. 36
Exercise Solution 2.20 ............................................................. 39
Exercise Solution 2.21 ............................................................. 43
Exercise Solution 2.22 ............................................................. 46
Exercise Solution 2.23 ............................................................. 49
Exercise Solution 2.24 ............................................................. 52
Exercise Solution 2.25 ............................................................. 55
Exercise Solution 2.26 ............................................................. 58
Exercise Solution 2.27 ............................................................. 62
Exercise Solution 2.28 ............................................................. 65
Exercise Solution 2.29 ............................................................. 67
Exercise Solution 2.30 ............................................................. 69
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Management Accounting
Purchases
5th June 9th June 21st June
@ £5 @ £5.50 @ £6
Issues
100 50 50
14th June (40 units) -40@£5
60
18th June (70 units) -60@£5 -10@£5.50
0 40
25th June (70 units) -40@£5.50 -30@£6
0 20
Value of closing inventory = (20 × £6) = £120
Issues to production = (100 × £5) + (50 × £5.5) + (30 × £6) =
£955
(b) LIFO method
Purchases
5th June 9th June 21st June
@ £5 @ £5.50 @ £6
Issues
100 50 50
14th June (40 units) -40@£5.50
10
18th June (70 units) -60@£5 -10@£5.50
40 0
25th June (70 units) -20@£5 -50@£6
20 0 0
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2: Cost behaviour and cost accounting techniques
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Management Accounting
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2: Cost behaviour and cost accounting techniques
Total cost =
£
Input from previous process
4 000 @ £3 each 12 000
Materials 35 350
Labour and overhead 10 006
Total cost 57 356
Expected scrap value of normal loss = 604 units × £5 = £3 020
57 356 – 3 020
Cost per unit =
3 396
= £16
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Management Accounting
Process Account
Units £ Units £
Costs Output
incurred
Input from 4 000 12 000 Actual output 3 500 56 000
previous (@ £16 p/u)
process
Materials added 35 350 Normal loss 604 3 020
(@ £5 p/u)
Labour & 10 006
Overhead
Abnormal gain 104 1 664
(@ £16 p/u)
Loss account
Units £ Units £
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2: Cost behaviour and cost accounting techniques
Process Account
Units £ Units £
Costs Output
incurred
Input from 4 000 12 000 Actual output 3 300 52 800
previous (@ £16 p/u)
process
Materials 35 350 Normal loss 604 3 020
added (@ £5 p/u)
Labour & 10 006 Abnormal 96 1 536
Overhead loss
(@ £16 p/u)
Loss account
Units £ Units £
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Management Accounting
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2: Cost behaviour and cost accounting techniques
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Management Accounting
(c)
Inventory values
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2: Cost behaviour and cost accounting techniques
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Management Accounting
PROCESSING ASSEMBLY
£ £
Finance 43 181.82 34 545.45
(£86 363.636) (750/1 500) (600/1 500)
Maintenance 103 750.00 66 022.73
(£188 636.36) (550/1 000) (350/1 000)
Total 146 931.82 100 568.18
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2: Cost behaviour and cost accounting techniques
Part (b)
Overall results
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Management Accounting
A B C D
£ £ £ £
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2: Cost behaviour and cost accounting techniques
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Management Accounting
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2: Cost behaviour and cost accounting techniques
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Management Accounting
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2: Cost behaviour and cost accounting techniques
The aim of the clinic’s costing system is to find the full cost
of treating a patient. A decision has been made to base this
on a cost per chiropodist hour.
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2: Cost behaviour and cost accounting techniques
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Management Accounting
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2: Cost behaviour and cost accounting techniques
(b) (i) Under marginal costing, only variable costs are charged to
cost units. Fixed costs are written off against sales of the
period in which they occur and, consequently, they are not
included in the closing inventory.
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Management Accounting
Period I Periods II
Marginal costing profit (£) 12 000 28 000
Opening inventory (units) 0 2 000
Closing inventory (units) 2 000 0
Inventory movement 2 000 (2 000)
Inventory movement x OAR (£) 4 000 (4 000)
Absorption costing profit (£) 16 000 24 000
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2: Cost behaviour and cost accounting techniques
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Management Accounting
March April
Marginal costing profit (£) 61 000 101 000
Opening inventory (units) – 2 000
Closing inventory (units) 2 000 –
Inventory movement 2 000 (2 000)
Inventory movement x OAR (£) 18 000 (18 000)
Absorption costing profit (£) 79 000 83 000
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2: Cost behaviour and cost accounting techniques
Purchases
4th May 8th May 23rd May
@ £6.40 @ £6.00 @ £6.20
Issues
80 30 40
15th May (50 units) –50
30
19th May (40 units) –30 –10
0 20
23rd May (30 units) –20 –10
0 30
Value of closing inventory = (30 × £6.20) = £186
Issues to production = (80 × £6.4) + (30 × £6) +
(10 × £6.20) = £754
(ii) LIFO method
Purchases
4th May 8th May 23rd May
@ £6.40 @ £6.00 @ £6.20
Issues
80 30 40
15th May (50 units) –20 –30
60 0
19th May (40 units) –40
20
23rd May (30 units) –30
0 10
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Management Accounting
Wtd av
cost per
Units £ unit £
4th May Purchase 80 units @ £6.4 80 512 6.40
8th May Purchase 30 units @ £6.0 30 180
110 692 6.29
15th May Issue 50 units –50 –315
19th May Issue 40 units –40 –252
23rd May
Purchase 40 units @ £6.20 40 248
60 373 6.22
27th May Issue 30 units –30 –187
30 186
Value of closing inventory = £186
Issues to production = £(315 + 252 + 187) = £754
(b) Recommendation
Since the chemical XG3 is stored in a single tank, new deliveries
will mingle with quantities already held. It would therefore be
logical to use the weighted average cost to value the chemical.
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2: Cost behaviour and cost accounting techniques
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Management Accounting
Total cost =
£
Input from previous process 6 000 @ £5 each 30 000
Materials 42 750
Labour and overhead 43 050
Total cost 115 800
Expected scrap value of normal loss = 240 units × £2.50 =
£600
115 800 – 600
Cost per unit = = £20
5 760
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2: Cost behaviour and cost accounting techniques
Process Account
Units £ Units £
Costs Output
incurred
Input from 6 000 30 000 Actual 5 740 114 800
previous output
process (@ £20 p/u)
Materials 42 750 Normal loss 240 600
added (@ £2.5 p/u)
Labour & 43 050 Abnormal 20 400
Overhead loss
(@ £20 p/u)
6 000 115 800 6 000 115 800
Loss account
Units £ Units £
Normal loss 240 600 Scrap 260 650
(@ £2.5 p/u) proceeds
received for
actual loss
(@ £2.5 p/u)
Abnormal Loss Bal
loss written to fig
(@ £20 p/u) 20 400 income 350
statement
260 1 000 260 1 000
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Management Accounting
Process Account
Units £ Units £
Costs Output
incurred
Input from 6 000 30 000 Actual 5 780 115 600
previous output
process (@ £20 p/u)
Materials 42 750 Normal loss 240 600
added (@ £2.5 p/u)
Labour & 43 050
Overhead
Abnormal gain 20 400
(@ £20 p/u)
6 020 116 200 6 020 116 200
Loss account
Units £ Units £
Normal loss 240 600 Scrap proceeds 220 550
(@ £2.5 p/u) received for
actual loss
(240 – 20) @
£2.5
Gainwritten Bal 350 Abnormal gain 20 400
to income fig @ £20 p/u)
statement
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2: Cost behaviour and cost accounting techniques
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Management Accounting
First allocate the joint costs between the joint products – Note
that the by-product will not be allocated any of the joint costs.
− Find the final sales value of each product
− Establish the ratio needed for each method
− Draw up the profit statements
− Value inventory
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2: Cost behaviour and cost accounting techniques
Less separate
(26 000) (52 000) (5 000) (83 000)
costs
Inventory values
Product J Product K Product L
£ £ £
Inventory as a
proportion of 2 000/15 000 1 500/18 000 750/7 000
output
(a) Total costs 65 375 99 250 23 375
Value of
8 717 8 271 2 504
inventory
(b) Total costs 61 294 115 529 11 177
Value of 8 173 9 627 1 198
inventory
(c) Total costs 57 234 106 494 24 272
Value of 7 631 8 875 2 601
inventory
Value of the by-product
1 000 litres of by-product can either be sold for £400 (1 000 @
£0.40) or further processed at a cost of £900 and sold for £1 500 (1
000 @ £1.50). Since the net realisable value of £600 (£1 500 -
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Management Accounting
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2: Cost behaviour and cost accounting techniques
General
Factory
Overhea SCC1 SCC2 PCCA PCCB
d £ £ £ £
£
Original costs 210 000 93 800 38 600 182 800 124 800
Primary (210 000) 10 500 21 000 31 500 147 000
apportionment
Sub-total 104 300 59 600 214 300 271 800
Apportion (104 300) - 91 262 13 038
SCC1 (63/72) (9/72)
Apportion - (59 600) 8 221 51 379
SSC2 (4/29) (25/29)
Total cost - - 313 783 336 217
Budgeted DLH 120 000 20 000
DLH rate £2.61 £16.81
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Management Accounting
two years. Next year total overheads are £650 000 yet current
year’s overheads must only be £640 000 (from (£3.10 ×
100 000) + (£11 × 30 000)).
(b) To fully recognise the existence of reciprocal service charges
must adopt either the repeated distribution or simultaneous
equation method:
Let
X = Total cost of service cost centre 1
Y = Total cost of service cost centre 2
X = 104 300 +1/30Y
Y = 59 600 + 18/
90 X
The above fractions make allowance for the work that service
cost centre 1 does for itself, as reflected by the fact that 10% of
personnel (the apportionment basis) are within service cost
centre 1. Consequently, to ensure that the full cost of this
service cost centre is charged to other cost centres the relevant
fraction is 90ths. Solving the equations:
X = 104 300 + 1986.67 + 1/150 X
149/ X = 106286.67
150
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2: Cost behaviour and cost accounting techniques
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Management Accounting
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2: Cost behaviour and cost accounting techniques
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Management Accounting
Therefore:
F = £200 000 + (0.2 × £157 895)
F = £231 579
Total allocations 397 000 314 000 200 000 100 000
Apportion 115 790 57 895 (231 579) 57 895
finance
Apportion 63 158 63 158 31 579 (157 895)
administration
Total cost 575 948 435 053 – –
Both methods should end with overhead absorption rates as follows:
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Management Accounting
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2: Cost behaviour and cost accounting techniques
Apportion 73 17 (100) 10
Stores
Apportion 7 3 – (10)
Maintenance
665 018 177 946 – –
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Management Accounting
Algebraic method
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2: Cost behaviour and cost accounting techniques
Human
Bookkeeping Accountancy Resources Payroll Cleaning
£ £ £ £ £
24 000 30 000 10 000 7 000 3 000
Apportion
Apportion:
£ £ £ £ £
IT IT Value 4 344 8 687 1 042 927 0
Maintenance
Insurances Floor Area 2 042 2 553 766 511 128
Heating/ Floor Area 4 085 5 106 1 532 1 021 256
Lighting
Telephones/ Number of 2 234 3 276 894 596 0
Broadband Employees
Human Order
£ Resources Payroll Cleaning Total £ of
Closure
Human 14 234 0 2 135 712 2 847 2
Resources
Payroll 10 055 3 519 0 503 4 022 1
Cleaning 3 384 169 169 0 338 3
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Management Accounting
Book- Human
keeping Accountancy Resources Payroll Cleaning
£ £ £ £ £
Total 36 705 49 622 14 234 10 055 3 384
Close 2 514 3 519 3 519 (10 055) 503
Payroll
Total 39 219 53 141 17 753 CLOSED 3 887
Close 7 310 9 399 (17 753) CLOSED 1 044
Human
Resources
(35:45:5)
Total 46 529 62 540 CLOSED CLOSED 4 931
Close 1 644 3 287 CLOSED CLOSED (4 931)
Cleaning
(30:60)
Total 48 173 65 827 CLOSED CLOSED CLOSED
Absorb
Calculation of Overhead Absorption Rates:
On basis of delivered hours
Bookkeeping = 48 173/2 000 = £24.09 per hour
Accountancy = 65 827/1 800 = £36.57 per hour
Absorption into services to create full cost:
Bookkeeping = £24.09 + £10.00 = £34.09 per hour
Accountancy = £36.57 + £18.00 = £54.57 per hour
(b) Comment on prices:
Paloma currently have a policy of charging full cost plus 15%.
Using the above absorption full costs this should equate to
prices of £39.20 for Bookkeeping and £62.76 for Accountancy
services per hour.
However, Paloma are currently charging £40 for bookkeeping
services (£0.80 more per hour) and only £60 for Accountancy
services (£2.76 less per hour).
Based on the services provided in the period just ended, this
had an overall impact of a loss of £3 368 ((2 000 × 0.8)–(1 800
× 2.76)). Paloma’s total costs for the period were £166 400
(£114 000 overheads and (2 000 × 10) + (1 800 × 18) staff
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2: Cost behaviour and cost accounting techniques
costs). Its total income was £188 000 ((2 000 × 40) + (1 800 ×
60)). This means that despite the overall loss of £3 368 costs
have still been fully covered.
Therefore Paloma will have to consider whether it is worthwhile
altering their current prices. It is clearly a competitive market
so it is unlikely that a substantial price increase would be
appropriate. If current demand levels are to remain and be
unaffected by any price changes, it would be possible for
Paloma to maintain its bookkeeping price and slightly increase
its accountancy prices from £60 to £62 to increase profits
(£3 368/1 800=£1.87 rounded to nearest £).
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Management Accounting
A B C
£ per unit £ per unit £ per unit
Direct cost 15.00 15.00 15.00
Overheads 5.67 2.84 2.84
Total cost 20.67 17.84 17.84
Price 20.00 20.00 20.00
Profit (0.67) 2.16 2.16
ii.
Machine costs = £55 000/(40 000+50 000+4 000)
= £0.5851 per machine hour
Production planning = £40 000/(10 + 13 + 2)
= £1 600 per production run
Quality control = £25 000/(10 + 13 + 2)
= £1 000 per production run
Set-up costs = £25 000/(10 + 13 + 2)
= £1 000 per production run
Receiving = £30 000/(10 + 10 + 2)
= £1 363.64 per component receipt
Packing = £15 000/(20 + 20 + 20)
= £250 per customer order
Note: Other cost drivers, especially for quality control,
seem possible, and, if justified, would gain equal credit.
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2: Cost behaviour and cost accounting techniques
A B C Total
£ £ £ £
Machine costs 23 404 29 255 2 341 55 000
Production 16 000 20 800 3 200 40 000
planning1
Quality control 10 000 13 000 2 000 25 000
Set-up costs 10 000 13 000 2 000 25 000
Receiving 13 636 13 636 2 728 30 000
Packing 5 000 5 000 5 000 15 000
Total overhead 78 040 94 691 17 269 190 000
costs
Units produced 20 000 25 000 2 000
Overhead £3.90 £3.79 £8.63
cost/unit
1. Example of calculation for A:
Cost driver rate
= (£1 600 per production run) × No of production runs
(10)
= £16 000
A B C
£ £ £
Direct materials 5.00 10.00 10.00
cost per unit
Direct labour cost 10.00 5.00 5.00
per unit
Production 3.90 3.79 8.63
overhead cost per
unit
Total cost per unit 18.90 18.79 23.63
Sales price 20.00 20.00 20.00
Profit per unit 1.10 1.21 (3.63)
(b) Implications for management
Indicates that, at current prices, C is not profitable, whilst A and
B are. Contrast this to the traditionally derived cost data which
suggested A was a loss-maker, with B and C profitable. This is
due to the disproportionate (relative to its volume) consumption
of cost drivers by C, compared to B and especially A.
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Management Accounting
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2: Cost behaviour and cost accounting techniques
Abracadabra
(a) Total direct material cost =
(30 000 × £25) + (20 000 × £20) + (8 000 × £11) =
£1 238 000
Materials handling OAR = £435 000/£1 238 000 = 35.14%
Total machine hours =
(30 000 × 11/3) + (20 000 × 1) + (8 000 × 2) = 76 000
Other overheads = £1 848 000 – £435 000 = £1 413 000
Machine hour rate = £1 413 000/76 000 = £18.59 per machine
hour
Product costs are therefore:
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2: Cost behaviour and cost accounting techniques
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Management Accounting
MACHINERY FITTING
(£000) (£000)
Direct cost 2 500 2 000
Apportioned overheads 6 500 4 000
Total cost 9 000 6 000
Total direct labour hours 1 100 000 350 000
Overhead absorption rate £8.182 per £17.143 per
direct direct
labour labour hour
hour
PRODUCT A PRODUCT B
£ £
Machinery department: 4 091 000
500 000 x 8.182
Machinery department: 4 909 200
600 000 x 8.812
Finishing department: 2 571 450
150 000 x 17.143
Finishing department: 3 428 600
200 000 x 17.143
Total costs 6 662 450 8 337 800
Volume 300 000 300 000
Unit cost (overhead) £22.21 £27.79
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2: Cost behaviour and cost accounting techniques
Cost
(£000)
Materials handling 340 × £590.55 = 200 787
Material procurement 500 × £307.69 = 153 845
Set up 24 × £2 403.85 = 57 693
Maintenance 12 000 × £83.33 = 999 960
Quality control 720 × £728.16 = 524 275
Machinery 500 000 × £2.27 = 1 135 000
Fitting 150 000 × £5.71 = 856 500
Total cost 3 928 060
Production volume (units) 300 000
Unit overhead cost £13.09
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Management Accounting
Cost
(£000)
Materials handling 2 200 × £590.55 = 1 299 210
Material procurement 6 000 × £307.69 = 1 846 140
Set up 600 × £2 403.85 = 1 442 310
Maintenance 18 000 × £83.33 = 1 499 940
Quality control 3 400 × £728.16 = 2 475 744
Machinery 600 000 × £2.27 = 1 362 000
Fitting 200 000 × £5.71 = 1 142 000
Total Cost 11 067 344
Production volume for 300 000
(units)
Unit overhead cost £36.89
(b) From the cost driver analysis it can be seen that B consumes
much more of the five overhead activities than A. This could be
reflected if Activity Based Costing were used. Instead, with
overhead absorption, the cost of the overhead activities is
shared according to the direct labour time of each product; B
would still have a higher amount of overhead attributed to it,
but a much lower share than with Activity Based Costing.
Product B, with its customised production, complexity, and
shorter, more numerous production runs, causes much more of
the overhead, and only with the use of Activity Based Costing
will this be reflected in the final unit costs. The use of direct
labour hours in the conventional system causes an inaccuracy in
product costings of about £9 a unit:
Unit
Costs
A B
£ £
Absorption Costing 22.21 27.79
Activity Based Costing 13.09 36.89
Activity Based Costing would be very useful for Devo, leading to
better awareness of costs incurred in production and potentially
better decision-making, for example, concerning pricing and
product mix. If, for Devo, the indirect costs are a significantly
high proportion of overall costs, the benefits are clear. There
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2: Cost behaviour and cost accounting techniques
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Management Accounting
(ii) Option 2:
Firstly determine total costs of each activity by allocating
and apportioning the cost items to the activities defined in
the question:
Activity Apportioned
Staff Direct office
cost1 costs2 supplies3 Total
(£) (£) (£) (£)
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2: Cost behaviour and cost accounting techniques
Cost Personnel
carried administration
forward apportioned1 Total Cost Cost driver
£ £ £ driver2 rate
Recruitment 812 500 183 211 995 711 Recruits £995 711/450
Disciplinary, 521 500 117 593 639 093 Staff £639 093/
Grievances numbers 1 000
and
Appraisals
Leavers 102 500 23 113 125 613 Leavers £125 613/550
Courses 398 500 89 858 488 358 Training £488 358/
days 3 500
Queries 205 000 46 225 251 225 Time £251 225/
spent 100%
2 040 000 460 000 2 500 000
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Management Accounting
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2: Cost behaviour and cost accounting techniques
(a) ii.
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Management Accounting
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2: Cost behaviour and cost accounting techniques
Q1 Q2 Q3 Q4
Opening 0 10 000 25 000 25 000
inventory
Production 50 000 60 000 50 000 40 000
Sales (40 000) (45 000) (50 000) (65 000)
Closing 10 000 25 000 25 000 0
inventory
Marginal costing statement
Q1 Q2 Q3 Q4
£ £ £ £
Sales 1 400 000 1 575 000 1 750 000 2 275 000
Cost of sales:
Opening inventory 0 (180 000) (450 000) (450 000)
Production (900 000) (1 080 000) (900 000) (720 000)
(£18/unit)
Closing inventory 180 000 450 000 450 000 0
Total cost of sales (720 000) (810 000) (900 000) (1 170 000)
Contribution 680 000 765 000 850 000 1 105 000
Fixed production (300 000) (300 000) (300 000) (300 000)
Selling and (400 000) (400 000) (400 000) (400 000)
distribution
Profit / (loss) (20 000) 65 000 150 000 405 000
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Management Accounting
Q1 Q2 Q3 Q4
£ £ £ £
(b)
Q1 Q2 Q3 Q4
Fixed cost/unit (£) 6 6 6 6
Movement in inventory 10 000 15 000 0 (25 000)
(units)
Marginal profit (£) (20 000) 65 000 150 000 405 000
Change in fixed 60 000 90 000 0 (150 000)
overhead inventory
valuation (£)
Absorption profit (£) 40 000 155 000 150 000 255 000
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Management Accounting
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Management Accounting
77 Mansell Street
London E1 8AN
+ 44 (0)20 75435600
Email: CustomerServices@cipfa.org
Website: www.cipfa.org.uk
72