Reference no: EM132547622

Question -

Part A: Button Pty Ltd manufactures two types of children's beds. The two products are Serta and Tempur. Button company, who currently use a conventional costing system, applies manufacturing overhead to all units at the rate of $90 per machine hour. Production information is as follows:

Serta Tempur

Direct material cost $40 $65

Direct labour cost $35 $35

Budget volume (units) 15,000 30,000

The management accountant at Button company has determined that the firm's overhead can be classified into three main activities: manufacturing machine setups, machine processing and product shipping. Information on the three cost drivers respectively is as follows:

Serta Tempur Total

Setups 100 60 160

Machine hours 25,000 45,000 70,000

Outgoing shipments 250 150 400

Button Ltd has total overhead of $6,300,000 and has been categorised as follows:

Manufacturing setups $1,344,000

Machine processing $3,556,000

Product shipping $1,400,000

Required:

1. Calculate the unit manufacturing cost of the Serta and the Tempu beds using the company's current overhead costing procedures.

2. Calculate the unit manufacturing cost of the Serta and the Tempu using activity-based costing. Show your calculations using a simple Excel spreadsheet.

3. Is the cost of the Tempu bed distorted by the use of machine hours to allocate total manufacturing overhead to production, and, if so by how much per unit?

4. Assume that the current selling price of the Tempu bed is $280 and the marketing director has proposed to offer a $30 discount to increase sales. Is the discount advisable? Advise management. Show supporting calculations.

5. 'Conventional costing will always distort product costs.' Discuss the validity of this statement.

Part B: Adam Smith, the owner of Button Pty Ltd, has explored the possibility of finding a cheaper supplier for the raw material required for the production of the Serta and the Tempu beds. He has an offer from a supplier which will reduce his raw material cost significantly and therefore lead to higher profits. There have been some reports that the material under consideration is of a poorer quality and has led to some minor accidents when sleeping the beds. The supplier has pointed out that these accidents have been fairly minor and the cost of refunding the clients and giving them some compensation for their injuries will still be cheaper overall for Adam and therefore result in higher profitability for Button Pty Ltd.

Advise Adam on what decision he should take with regards to the supplier and raw material. Support your answer with any cases or guidelines you consider relevant.

Part C: You are required to male a proposal on the potential benefits and costs of implementing an Activity Based Costing (ABC) system to determine customer profitability for a grocery wholesaler, Santana Corporation. The company currently use a conventional costing system. The clients of Santana Corporation vary in size and therefore the smaller supermarket operators will tend to place many smaller orders, whereas the larger supermarkets will place larger orders but less often.

Required:

1. Advise Santana Corporation on suggested activities and activity drivers, explaining to management why you consider these appropriate.

2. Using at least two academic research articles to support your background research, advise the management of Santana Corporation on the potential benefits and costs associated with implementing an Activity Based Costing system.