Question Tag: Activity-Based Costing

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  • 30 Marks

PM – May 2015 – L2 – SA – Q1 – Cost-Volume-Profit (CVP) Analysis

Analyze Tadefo Limited's activity-based costing, discuss budgeting weaknesses, and describe the advantages of ABB and ZBB.

TADEFO LIMITED is a manufacturing company which produces and assembles car components. The company has two main production departments: Machining and Assembling. Each of the two departmental managers is responsible for producing annual budgets based on targets set by the management. From last year’s budget, TADEFO Limited hoped to turn an expected 10 percent rise in total revenue into a 20 percent increase in the company’s profits.

The following budgeted information relates to TADEFO Limited for the forthcoming period:

Products Information:

Products ACQ BEZ CFJ
Sales and production (units) 30,000 50,000 40,000
Selling price (per unit) (N) 73 45 95
Prime cost (per unit) (N) 65 32 84
Machine Dept. (hrs per unit) 4 2 5
Assembly Dept. (hrs per unit) 2 7 3

Overheads Re-Analyzed into Cost Pools:

Cost Pool Amount (N’000) Cost Driver Quantity for the period
Machine services 359 Machine hours 425,000
Assembly services 328 Direct labour hours 532,000
Set-up costs 36 Set-ups 720
Order processing 165 Customer orders 34,000
Purchasing 88 Supplier’s orders 12,400
Total Overheads 976

You have also been provided with the following estimates for the period:

ACQ BEZ CFJ
Number of set-ups 220 130 210
Customer orders 18,000 10,000 10,000
Suppliers’ orders 5,200 3,600 4,200

Required: a. Prepare and present a profit statement using activity-based costing. (14 Marks)
b. What would you consider to be the weaknesses of an incremental budgeting system for a company such as TADEFO Limited? (5 Marks)
c. Describe Activity-Based Budgeting (ABB) and comment on the advantages of its use by TADEFO Limited. (5 Marks)
d. Explain how the use of Zero-Based Budgeting (ZBB) can motivate employees. (3 Marks)
e. “Encouraging employee participation in budget setting is beneficial” Discuss. (3 Marks)

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  • 20 Marks

PM – May 2021 – L2 – Q6 – Costing Systems and Techniques

Evaluate production costs per unit using both absorption and activity-based costing for Chukwukah Nigeria Limited.

Chukwukah Nigeria Limited manufactures three products, JEL, JET and JAL. Demand for
products JEL and JET is relatively elastic whilst demand for product JAL is relatively
inelastic. Each product uses the same materials and the same type of direct labour but
in different quantities. For many years, the company has been using full absorption
costing and absorbing overheads on the basis of direct labour hours. Selling prices are
then determined using cost plus pricing. This is common in the company‟s industry with
most competitors applying a standard mark-up.
Budgeted production and sales volumes for JEL, JET and JAL for the next year are
25,000, 20,000 and 27,600 units respectively.
The budgeted direct costs of the three products are shown below:

In the coming year, Chukwukah also expects to incur indirect production costs of
N6,887,000, which are analysed as follows:

The following additional data relates to each product:

The management of Chukwukah Nigeria Limited wants to boost sales revenue in order to
increase profits but its capacity to do this is limited because of its use of cost plus
pricing and the application of standard mark-up. The management accountant has
suggested using activity based costing (ABC) instead of full absorption costing, since
this will alter the cost of the products and may therefore enable a different price to be
charged.

Required:
a. Calculate the budgeted full production cost per unit of each product using absorption costing, rounded to two decimal places. (6 Marks)

b. Calculate the budgeted full production cost per unit of each product using activity-based costing (ABC), rounded to two decimal places. (8 Marks)

c. Discuss the impact on selling prices and sales volumes of each product that could result from changing to activity-based costing. (6 Marks)

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  • 20 Marks

PM – May 2017 – L2 – SA – Q2 – Costing Systems and Techniques

Calculate profit per motorcycle type using existing and ABC methods and evaluate costing methods for overhead absorption.

Sadet Nigeria Limited assembles three types of motorcycles at the same factory: the 50cc Prelude, the 100cc Roadmaster, and the 150cc Roadstar. Sadet has invested in manufacturing technology to reduce labor costs in response to market demands.

Historically, Sadet used direct labor hours to allocate overhead costs. Now, they are considering activity-based costing (ABC).

Motorcycle Data:

Requirements:

a. Calculate the total profit for each of Sadet’s three motorcycle types, using:

  • i. The existing overhead allocation method based on labor hours.
  • ii. Activity-Based Costing (ABC).
    (14 Marks)

b. Write a report for Sadet’s directors as a Management Accountant, evaluating the labor hours versus activity-based costing methods in Sadet’s circumstances.
(6 Marks)

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  • 20 Marks

PM – Nov 2016 – L2 – Q3 – Costing Systems and Techniques

Question tests understanding of Activity Based Costing features and benefits, along with organizational performance measurement through financial and non-financial indicators.

Adelab Nigeria Limited is a manufacturer of industrial gear. Over the years, the company has collected, allocated and absorbed overhead cost based on the traditional absorption costing technique.

The current economic recession in the country and stiff competition in the market are seriously affecting the company’s performance and market share as its competitors have in recent times, introduced discounts to their customers. The customers of Adelab have therefore been putting pressure on the company to follow suit and few of these customers have started patronising the company’s competitors who offer discounts on every purchase.

To address these problems and other strategic and operational issues affecting the company, the Board of Directors of Adelab decided recently to appoint a seasoned management expert as Business Process Executive (BPE). The BPE recently advised the Board to organise a management retreat. The focus of the retreat is strategic management, cost control and performance management. During the course of the retreat, new costing techniques such as activity based management, life cycle costing, target costing, Kaizen costing, throughput accounting, backflush accounting, just in time approach to inventory management, etc., were discussed by the BPE. The need to also consider both financial and non-financial performance measurements was also discussed. The BPE further highlighted the need for the company to link its Key Performance Indicators (KPIs) to its strategic and operational Critical Success Factors (CSF), to achieve a better focus and improve its financial performance.

In a board meeting after the retreat, the following discussions took place:
Technical Director: “To improve our financial performance I think I will have to agree
with the BPE‟s submission at the retreat that we replace absorption costing approach
with an Activity Based Costing (ABC) system. I believe this will help us to put a tap on
cost and thus improve cost control and increase profit margins. We can then pass
some of these costs reduction to our customers in form of discounts”.
Managing Director: “Yes, I agree with your opinion but I also think we need to
monitor our performance in both financial and non-financial terms. For example, loss
of sales could be due to charging a higher price than our competitors and as well as
producing bad quality product. I therefore think that, while we should consider
introducing activity based costing, we should also consider ways in which the
company could monitor and assess performance on a wider basis”.

You are required to:

a. Describe FIVE key features of Activity Based Costing (ABC) and provide SIX advantages and FOUR disadvantages of adopting Activity Based Costing (ABC) approach to cost accumulation. (10 Marks)

b. Explain the need for the measurement of organisational and managerial performance giving examples of the range of financial and non-financial performance measures that might be used. (10 Marks)

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  • 20 Marks

PM – May 2022 – L2 – SA – Q4 – Costing Systems and Techniques

Analysis of activity-based costing applications and challenges in large service organizations.

Large service organisations, such as banks and hospitals, used to be noted for their lack of management accounting techniques and their relatively unsophisticated budgeting and control systems compared with large manufacturing organisations. But this is changing and many large service organisations are now revising their use of management accounting techniques, especially as it relates to activity-based approaches.

Required:
a. Explain which features of large-scale service organisations encourage the application of activity-based approaches to the analysis of cost information. (5 Marks)

b. Explain which features of service organisations may create problems for the application of activity-based costing. (5 Marks)

c. Explain the uses for activity-based cost information in service industries. (5 Marks)

d. Many large service organisations were at one time state-owned, but have been privatised. Examples in some countries include electricity supply and telecommunications. They are often regulated. Similar systems of regulation of prices by an independent authority exist in many countries and are designed to act as a surrogate for market competition in industries where it is difficult to ensure a genuinely competitive market. Explain which aspects of cost information and systems in service organisations would particularly interest a regulator, and why these features would be of interest. (5 Marks)

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  • 1 Marks

MI – Nov 2020 – L1 – SA – Q11 – Costing Techniques

Identify the method that allocates overhead to products based on activities that give rise to costs.

Which of the following attributes support overhead to products using the activities which give rise to the cost?

A. Activity based costing

B. Absorption costing

C. Marginal costing

D. Standard costing

E. Activity based budgeting

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  • 1 Marks

MI – Nov 2014 – L1 – SA – Q17 – Costing Methods

This question asks about the appropriate method for allocating overhead costs in product costing.

A method of product costing which aims to include, in the total cost of a product, an appropriate share of the organisation’s total overhead is:
A. Marginal costing
B. Activity-based costing
C. Differential costing
D. Absorption costing
E. Product costing

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  • 5 Marks

MI – Nov 2021 – L1 – SB – Q1b – Costing Methods

List three advantages and two disadvantages of Activity-Based Costing.

State THREE advantages and TWO disadvantages of the activity-based costing (ABC) system.

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  • 1 Marks

MI – Nov 2021 – L1 – SA – Q5 – Costing Methods

Identify the scenario in which Activity-Based Costing is NOT suitable.

Activity-based costing is NOT suitable as a method of costing in which of the following circumstances?

A. Where absorption costing is required for inventory valuation
B. Where large proportion of production costs are overhead costs
C. Where products are provided to customer specifications
D. Where production process is not complex
E. Where direct labour costs are relatively small

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  • 20 Marks

PM – Mar/Jul 2020 – L2 – Q3 – Activity-Based Costing vs. Traditional Costing for Sedeco Nigeria

Calculation of unit costs for three products using traditional and activity-based costing approaches.

Sedeco Nigeria Limited manufactures and sells three products, Alpha, Beta, and Gamma. For some time now, the company has been concerned about its cost allocation system and has been searching for a more efficient way of cost allocation. The company recently employed a management accountant who informed the management that activity-based costing is a more efficient cost allocation system, leading to improvements in cost accuracy and reduction.

The management accountant discovered that the company has direct materials, direct labor, and five indirect cost pools which represent the five activity areas. The prior product costing system uses the two direct cost categories and a single indirect cost pool where overheads are allocated using direct labor hours. The following information is provided for the next period:

Direct labor is paid at N100 per hour. Overhead costs in the period are expected to be as follows:

Also, the company is considering the pricing of the three products because sales prices have remained uncertain as shown in the table below:

Required:
a. Calculate the unit costs of each product using:
(i) Prior product costing approach (traditional cost)
(ii) The Activity-Based Costing method (ABC). (10 Marks)

b. Compute the expected sales prices for the three products and the profit or loss that will arise from the implementation of the ABC costing approach and the traditional costing method. (8 Marks)

c. State reasons why the activity-based costing approach may be preferred to the traditional absorption costing approach in a modern manufacturing environment. (2 Marks)

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  • 30 Marks

PM – May 2015 – L2 – SA – Q1 – Cost-Volume-Profit (CVP) Analysis

Analyze Tadefo Limited's activity-based costing, discuss budgeting weaknesses, and describe the advantages of ABB and ZBB.

TADEFO LIMITED is a manufacturing company which produces and assembles car components. The company has two main production departments: Machining and Assembling. Each of the two departmental managers is responsible for producing annual budgets based on targets set by the management. From last year’s budget, TADEFO Limited hoped to turn an expected 10 percent rise in total revenue into a 20 percent increase in the company’s profits.

The following budgeted information relates to TADEFO Limited for the forthcoming period:

Products Information:

Products ACQ BEZ CFJ
Sales and production (units) 30,000 50,000 40,000
Selling price (per unit) (N) 73 45 95
Prime cost (per unit) (N) 65 32 84
Machine Dept. (hrs per unit) 4 2 5
Assembly Dept. (hrs per unit) 2 7 3

Overheads Re-Analyzed into Cost Pools:

Cost Pool Amount (N’000) Cost Driver Quantity for the period
Machine services 359 Machine hours 425,000
Assembly services 328 Direct labour hours 532,000
Set-up costs 36 Set-ups 720
Order processing 165 Customer orders 34,000
Purchasing 88 Supplier’s orders 12,400
Total Overheads 976

You have also been provided with the following estimates for the period:

ACQ BEZ CFJ
Number of set-ups 220 130 210
Customer orders 18,000 10,000 10,000
Suppliers’ orders 5,200 3,600 4,200

Required: a. Prepare and present a profit statement using activity-based costing. (14 Marks)
b. What would you consider to be the weaknesses of an incremental budgeting system for a company such as TADEFO Limited? (5 Marks)
c. Describe Activity-Based Budgeting (ABB) and comment on the advantages of its use by TADEFO Limited. (5 Marks)
d. Explain how the use of Zero-Based Budgeting (ZBB) can motivate employees. (3 Marks)
e. “Encouraging employee participation in budget setting is beneficial” Discuss. (3 Marks)

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  • 20 Marks

PM – May 2021 – L2 – Q6 – Costing Systems and Techniques

Evaluate production costs per unit using both absorption and activity-based costing for Chukwukah Nigeria Limited.

Chukwukah Nigeria Limited manufactures three products, JEL, JET and JAL. Demand for
products JEL and JET is relatively elastic whilst demand for product JAL is relatively
inelastic. Each product uses the same materials and the same type of direct labour but
in different quantities. For many years, the company has been using full absorption
costing and absorbing overheads on the basis of direct labour hours. Selling prices are
then determined using cost plus pricing. This is common in the company‟s industry with
most competitors applying a standard mark-up.
Budgeted production and sales volumes for JEL, JET and JAL for the next year are
25,000, 20,000 and 27,600 units respectively.
The budgeted direct costs of the three products are shown below:

In the coming year, Chukwukah also expects to incur indirect production costs of
N6,887,000, which are analysed as follows:

The following additional data relates to each product:

The management of Chukwukah Nigeria Limited wants to boost sales revenue in order to
increase profits but its capacity to do this is limited because of its use of cost plus
pricing and the application of standard mark-up. The management accountant has
suggested using activity based costing (ABC) instead of full absorption costing, since
this will alter the cost of the products and may therefore enable a different price to be
charged.

Required:
a. Calculate the budgeted full production cost per unit of each product using absorption costing, rounded to two decimal places. (6 Marks)

b. Calculate the budgeted full production cost per unit of each product using activity-based costing (ABC), rounded to two decimal places. (8 Marks)

c. Discuss the impact on selling prices and sales volumes of each product that could result from changing to activity-based costing. (6 Marks)

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  • 20 Marks

PM – May 2017 – L2 – SA – Q2 – Costing Systems and Techniques

Calculate profit per motorcycle type using existing and ABC methods and evaluate costing methods for overhead absorption.

Sadet Nigeria Limited assembles three types of motorcycles at the same factory: the 50cc Prelude, the 100cc Roadmaster, and the 150cc Roadstar. Sadet has invested in manufacturing technology to reduce labor costs in response to market demands.

Historically, Sadet used direct labor hours to allocate overhead costs. Now, they are considering activity-based costing (ABC).

Motorcycle Data:

Requirements:

a. Calculate the total profit for each of Sadet’s three motorcycle types, using:

  • i. The existing overhead allocation method based on labor hours.
  • ii. Activity-Based Costing (ABC).
    (14 Marks)

b. Write a report for Sadet’s directors as a Management Accountant, evaluating the labor hours versus activity-based costing methods in Sadet’s circumstances.
(6 Marks)

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  • 20 Marks

PM – Nov 2016 – L2 – Q3 – Costing Systems and Techniques

Question tests understanding of Activity Based Costing features and benefits, along with organizational performance measurement through financial and non-financial indicators.

Adelab Nigeria Limited is a manufacturer of industrial gear. Over the years, the company has collected, allocated and absorbed overhead cost based on the traditional absorption costing technique.

The current economic recession in the country and stiff competition in the market are seriously affecting the company’s performance and market share as its competitors have in recent times, introduced discounts to their customers. The customers of Adelab have therefore been putting pressure on the company to follow suit and few of these customers have started patronising the company’s competitors who offer discounts on every purchase.

To address these problems and other strategic and operational issues affecting the company, the Board of Directors of Adelab decided recently to appoint a seasoned management expert as Business Process Executive (BPE). The BPE recently advised the Board to organise a management retreat. The focus of the retreat is strategic management, cost control and performance management. During the course of the retreat, new costing techniques such as activity based management, life cycle costing, target costing, Kaizen costing, throughput accounting, backflush accounting, just in time approach to inventory management, etc., were discussed by the BPE. The need to also consider both financial and non-financial performance measurements was also discussed. The BPE further highlighted the need for the company to link its Key Performance Indicators (KPIs) to its strategic and operational Critical Success Factors (CSF), to achieve a better focus and improve its financial performance.

In a board meeting after the retreat, the following discussions took place:
Technical Director: “To improve our financial performance I think I will have to agree
with the BPE‟s submission at the retreat that we replace absorption costing approach
with an Activity Based Costing (ABC) system. I believe this will help us to put a tap on
cost and thus improve cost control and increase profit margins. We can then pass
some of these costs reduction to our customers in form of discounts”.
Managing Director: “Yes, I agree with your opinion but I also think we need to
monitor our performance in both financial and non-financial terms. For example, loss
of sales could be due to charging a higher price than our competitors and as well as
producing bad quality product. I therefore think that, while we should consider
introducing activity based costing, we should also consider ways in which the
company could monitor and assess performance on a wider basis”.

You are required to:

a. Describe FIVE key features of Activity Based Costing (ABC) and provide SIX advantages and FOUR disadvantages of adopting Activity Based Costing (ABC) approach to cost accumulation. (10 Marks)

b. Explain the need for the measurement of organisational and managerial performance giving examples of the range of financial and non-financial performance measures that might be used. (10 Marks)

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  • 20 Marks

PM – May 2022 – L2 – SA – Q4 – Costing Systems and Techniques

Analysis of activity-based costing applications and challenges in large service organizations.

Large service organisations, such as banks and hospitals, used to be noted for their lack of management accounting techniques and their relatively unsophisticated budgeting and control systems compared with large manufacturing organisations. But this is changing and many large service organisations are now revising their use of management accounting techniques, especially as it relates to activity-based approaches.

Required:
a. Explain which features of large-scale service organisations encourage the application of activity-based approaches to the analysis of cost information. (5 Marks)

b. Explain which features of service organisations may create problems for the application of activity-based costing. (5 Marks)

c. Explain the uses for activity-based cost information in service industries. (5 Marks)

d. Many large service organisations were at one time state-owned, but have been privatised. Examples in some countries include electricity supply and telecommunications. They are often regulated. Similar systems of regulation of prices by an independent authority exist in many countries and are designed to act as a surrogate for market competition in industries where it is difficult to ensure a genuinely competitive market. Explain which aspects of cost information and systems in service organisations would particularly interest a regulator, and why these features would be of interest. (5 Marks)

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  • 1 Marks

MI – Nov 2020 – L1 – SA – Q11 – Costing Techniques

Identify the method that allocates overhead to products based on activities that give rise to costs.

Which of the following attributes support overhead to products using the activities which give rise to the cost?

A. Activity based costing

B. Absorption costing

C. Marginal costing

D. Standard costing

E. Activity based budgeting

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  • 1 Marks

MI – Nov 2014 – L1 – SA – Q17 – Costing Methods

This question asks about the appropriate method for allocating overhead costs in product costing.

A method of product costing which aims to include, in the total cost of a product, an appropriate share of the organisation’s total overhead is:
A. Marginal costing
B. Activity-based costing
C. Differential costing
D. Absorption costing
E. Product costing

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  • 5 Marks

MI – Nov 2021 – L1 – SB – Q1b – Costing Methods

List three advantages and two disadvantages of Activity-Based Costing.

State THREE advantages and TWO disadvantages of the activity-based costing (ABC) system.

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  • 1 Marks

MI – Nov 2021 – L1 – SA – Q5 – Costing Methods

Identify the scenario in which Activity-Based Costing is NOT suitable.

Activity-based costing is NOT suitable as a method of costing in which of the following circumstances?

A. Where absorption costing is required for inventory valuation
B. Where large proportion of production costs are overhead costs
C. Where products are provided to customer specifications
D. Where production process is not complex
E. Where direct labour costs are relatively small

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  • 20 Marks

PM – Mar/Jul 2020 – L2 – Q3 – Activity-Based Costing vs. Traditional Costing for Sedeco Nigeria

Calculation of unit costs for three products using traditional and activity-based costing approaches.

Sedeco Nigeria Limited manufactures and sells three products, Alpha, Beta, and Gamma. For some time now, the company has been concerned about its cost allocation system and has been searching for a more efficient way of cost allocation. The company recently employed a management accountant who informed the management that activity-based costing is a more efficient cost allocation system, leading to improvements in cost accuracy and reduction.

The management accountant discovered that the company has direct materials, direct labor, and five indirect cost pools which represent the five activity areas. The prior product costing system uses the two direct cost categories and a single indirect cost pool where overheads are allocated using direct labor hours. The following information is provided for the next period:

Direct labor is paid at N100 per hour. Overhead costs in the period are expected to be as follows:

Also, the company is considering the pricing of the three products because sales prices have remained uncertain as shown in the table below:

Required:
a. Calculate the unit costs of each product using:
(i) Prior product costing approach (traditional cost)
(ii) The Activity-Based Costing method (ABC). (10 Marks)

b. Compute the expected sales prices for the three products and the profit or loss that will arise from the implementation of the ABC costing approach and the traditional costing method. (8 Marks)

c. State reasons why the activity-based costing approach may be preferred to the traditional absorption costing approach in a modern manufacturing environment. (2 Marks)

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