Pretty Good Picture framing is costing a large job (no. 60) for a client. The current costing system allocates manufacturing overhead based on machine hours. However the accountant is considering introducing an ABC costing system and has obtained the following information:
Budgeted overheads (Costs) Budgeted quantity of cost drivers
Material handling $ 40,000
Material moves 500
Machine maintenance $ 231,000
Machine Hours 10,000
Product inspection $ 18,000
Inspections 1,200
TOTAL Mfg Overhead $ 289,000
JOB 60
Number of materials moves 10
Machine hours 40
Number of inspections 9
Required:
a) What amount of overhead would be allocated to Job 60 under the current costing system? (4 marks)
b) Calculate the cost of Job 60’s overhead under ABC costing, using appropriate cost drivers for the three identified activities.
(8 marks)
c) Describe which costing system is more accurate and explain why there are differences between traditional costing and ABC costing allocated amounts.
Explain the need for these more modern (ABC) costing systems. (4 marks) 200words
d) Some of the activities in the budget above may be classified as either value-added or non-value added or grey areas (partly value-added and partly non-value added). (400 word maximum)
i) Identify two of the activities in the budget above that may be classified as grey areas (both value-added and non-value added). (2 marks)
ii) Describe why some activities have a value-added portion and a non-value added portion. How the ABC information may be used to improve managerial decisionmaking (activity-based management (ABM)) to reduce the non-value added
portion. Give examples. (5 marks)