Topic: Activity-based costing

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MA – Nov 2024 – L2 – Q3b – Activity-Based Costing (ABC) in the Service Sector

Assessment of ABC's applicability in the service sector and identification of four units in healthcare where it can be applied.

Question

In their effort to build equitable, resilient, and sustainable systems for health, both The Global Fund and Gavi have approached you on the implementation of ABC systems to improve their customer profitability analysis.

Required:

Assess the applicability of Activity-Based Costing (ABC) in the services sector. In explaining your answer, identify four units in the healthcare sector where ABC systems are applicable and specify an appropriate cost driver for each.

Answer

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Tags: Activity-Based Costing, Cost Control, Cost Drivers, Healthcare, Service Sector
Level: Level 2

Topic: Activity-based costing
Series: Nov 2024

MA – Aug 2022 – L2 – Q2a – Activity-based costing

This question asks for the calculation of activity rates and the cost per unit of product X using activity-based costing.

Question

The details of unit cost of products X, Y, and Z have been provided below:

Product	X	Y	Z
Demand (units)	1,200	2,800	3,000
GH¢	GH¢	GH¢	GH¢
Direct Material	70	55	40
Direct Labour	65	60	38
Variable Overheads	11	8	7
Fixed Overhead	32	24	20

Additional information:

The fixed overheads were absorbed at the rate of GH¢8 per machine hour.
The budgeted fixed overheads of GH¢165,600 can be analysed into the following cost pools with their respective percentages for apportionment:

Cost Pool Percentages (%)

Batch 20

Machinery 45

Customer service 25

Deliveries 10
The following also relates to the activities of the company:

Cost Pool	Percentages (%)
Batch	20
Machinery	45
Customer service	25
Deliveries	10

Product	X	Y	Z
Units in a batch	120	140	200
Quantities per delivery	100	280	250
Number of customers	50	180	220

Required:
i) Calculate the activity rates per batch, machine hour, customer service, and delivery.
(12 marks)

ii) Calculate the total cost of a unit of product X.
(3 marks)

Answer

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Tags: Activity-Based Costing, Cost Pools, Costing Techniques, Overhead Absorption, Unit Cost Calculation
Level: Level 2

Topic: Activity-based costing
Series: AUG 2022

MA – May 2018 – L2 – Q3c – Activity-Based Costing

Calculate the total overhead absorbed per unit using Activity-Based Costing and identify three types of cost controls.

Question

Dunning Limited has recently introduced an Activity Based Costing System and has
provided the following details for the month of January:

During the month, 500 units of Product Y were produced. This production run required
100 parts and 150 maintenance hours; 5 material requisitions were made and 10
employees worked on the units.
Required:
i) Using Activity Based Costing, calculate the total amount of overhead absorbed by each
unit of Product Y. (7 marks)
ii) Identify THREE different types of controls and explain how activity based costing assists
in the control of costs?

Answer

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Tags: Activity-Based Costing, Cost Control, Cost Pools, Overhead Absorption, Product costing
Level: Level 2

Topic: Activity-based costing
Series: MAY 2018

MA – May 2018 – L2 – Q3b – Activity-Based Costing

Identify three disadvantages of a standard costing system.

Question

Identify THREE disadvantages of a standard costing system.

Answer

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Tags: Activity-Based Costing, Cost Control, Cost Pools, Overhead Absorption
Level: Level 2

Topic: Activity-based costing
Series: MAY 2018

MA – Nov 2017 – L2 – Q3 – Activity-based costing

Calculate the prime cost, profit per unit using both absorption and activity-based costing, and comment on the differences and limitations.

Question

Bonti Ltd produces three different products using two production departments. The company currently uses Absorption Costing to establish product costs and profitability. The Directors have recently attended a conference on Activity Based Costing (ABC) and are examining whether ABC might provide a better system for Bonti Ltd.

The following budgeted information for the period ended 31 December 2017 has been collated for each of the three products:

Product	Taya	Maya	Paya
Production and Sales (units)	8,750	4,000	6,000
Unit sales price (GH¢)	56	106	84
Direct materials	1.5kg	6kg	7kg
Direct labour:
– Machine Department (hours per unit)	1 hour	8 hours	6 hours
– Assembly Department (hours per unit)	4 hours	3 hours	1 hour
Direct expenses (GH¢ per unit)	2	6	3
Machine Department (machine hours per unit)	2 hours	5 hours	4 hours

Raw material costs GH¢4 per kilo, and the hourly rate for all labour is GH¢5. The direct expenses relate entirely to specialized packaging, which is uniquely designed for each of the products and is therefore directly attributable to that product alone.

The current costing system absorbs overheads to the Machine and Assembly Departments on the basis of a recovery rate of GH¢3.50 per machine hour and GH¢1 per labour hour respectively.

The following is an analysis of the overheads by department:

Department	Overheads (GH¢)
Purchasing Department	22,400
Production Set-up & Design Dept	34,500
Customer Service Department	32,600
Machine Department	123,000
Assembly Department	26,500

The Departmental Managers have provided the following additional information about operations in their departments:

Activity	Taya	Maya	Paya	Total
Number of set-ups	10	10	30	50
Number of customer orders	80	86	160	326
Number of purchase orders	30	32	50	112

The Machine Department is capital intensive, and the Assembly Department is labour intensive.

Required:

a) Calculate the prime cost for each product.
b) Calculate the profit per unit for each product if overheads are absorbed on the Current Costing basis.
c) Calculate the profit per unit for each product if overheads are absorbed using an Activity Based Costing approach. Clearly identify any cost drivers you assign.
d) Comment on why there is a difference between the profit/loss shown on an Absorption Costing basis and that shown using Activity Based Costing.
e) Identify THREE limitations of Activity Based Costing.

Answer

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Tags: ABC Limitations, Cost Drivers, Overhead Allocation, Prime Cost, Profit Analysis
Level: Level 2

Topic: Activity-based costing
Series: NOV 2017

MA – July 2023 – L2 – Q3a – Activity-Based Costing

This question involves calculating the cost driver rates and overhead cost per unit using the Activity-Based Costing (ABC) technique for three products under the 1D1F policy.

Question

The following three products are produced by a company under the “1D1F” policy with additional information provided.

Product	Cee	Dee	Gee
Units	4,000	6,000	4,800
Labour hours per unit	3	2.5	1.5
Number of units in a batch	400	500	600
Number of machine hours per unit	4	5	7

The annual overheads have been grouped under three headings:

Overhead Category	Amount (GH¢)
Labour related	45,000
Batch related	69,000
Machine related	120,000

Required:
i) Using the Activity Based Costing (ABC) technique, calculate the Cost Driver Rates for each group of overheads.
(6 marks)

ii) Calculate the overhead cost per unit of product “Cee” under the ABC technique.
(4 marks)

Answer

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Tags: Activity-Based Costing, Cost driver rates, Overhead Allocation
Level: Level 2

Topic: Activity-based costing
Series: JULY 2023

MA – May 2021 – L2 – Q3a – Activity-based costing

Calculate the product unit costs for Santo's product lines using activity-based costing.

Question

a) Santo has three product lines: P1, P2, and P3. Since its inception, the company has been using a single direct labour cost percentage to assign overhead costs to products. Despite P3 being a relatively new product line, it is attracting additional business. However, increasing overhead costs have resulted in loss-making in recent times. P2 particularly has been a significant product line since its inception. However, it has lost considerable market share due to an increase in overhead cost in recent times and a consequent increase in price per unit. Management is, therefore, convinced that the costing system needs some review. A team led by the management accountant was put together to develop an improved system of costing based on activities. The team spent several weeks collecting data for the different activities and products.

Below is data on Santo’s three product lines and overhead costs for the current accounting period:

	P1	P2	P3
Production volume (units)	7,500	12,500	4,000
Selling price per unit (GH¢)	47	80	68
Material cost per unit (GH¢)	18	25	16
Direct labour cost per unit (GH¢)	4	8	6.4
Materials movements (in total)	4	25	50
Machine hours per unit	0.5	0.5	0.2
Set-ups (in total)	1	5	10
The proportion of engineering work	30%	20%	50%
Orders packed (in total)	1	7	22

Activities overhead cost:

Machine maintenance and depreciation: GH¢390,000
Material receiving and handling: GH¢150,000
Engineering: GH¢100,000
Packing: GH¢60,000
Set-up labour: GH¢18,688
Total: GH¢718,688

Required: Identify for each overhead activity, an appropriate cost driver from the information supplied, and then calculate the product unit costs using a system that assigns overheads based on the use of activities. (10 marks)

Answer

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Tags: Activity-Based Costing, Cost Drivers, Overhead Allocation, Product costing
Level: Level 2

Topic: Activity-based costing
Series: MAY 2021

MA – April 2022 – L2 – Q3b – Activity-based costing

Differentiate between Activity-Based Budgeting and Incremental Budgeting, explain ABB processes, and discuss arguments for and against ABB.

Question

Kankum Industries is considering switching from Incremental Budgeting to Activity-Based Budgeting (ABB) because of the argued pricing specificity of the ABB approach. The Chairman of the Finance Sub-Committee of the board, who does not have an accounting background, has contacted you for clarification on some key issues relating to ABB in order to assist in his explanation to the board.

Required:

i) Differentiate between Activity-Based Budgeting and Incremental Budgeting. (3 marks)

ii) Explain the process in ABB. (3 marks)

iii) State TWO (2) arguments in favour and TWO (2) arguments against ABB. (4 marks)

Answer

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Tags: Activity Based Budgeting, Budgeting Process, Incremental Budgeting
Level: Level 2

Topic: Activity-based costing
Series: APR 2023

MA – April 2022 – L2 – Q2a – Activity-based costing

Evaluate the bottleneck resource at Pikambi Hospital and suggest ways to reduce turnaround time.

Question

The Pikambi Hospital serves a community with a population of about 20,000. For Out Patients Department (OPD) services, there are three basic stages to seeing the doctor which have been described below:

Stage 1
Records: This is where files of patients are kept. On arrival, a patient presents the identity card together with the National Health Insurance Scheme (NHIS) card. There are two biometric verification machines to confirm the validity of the card and recording of basic personal data on the claim forms. The process takes approximately 10 minutes per machine. Workers here work from 6:00 am to 4:00 pm.

Stage 2
Vitals: Here vital personal information about the patient’s current health status is checked; i.e. temperature, pulse, blood pressure, weight, and sugar levels. There is one machine with 5 nurses. It takes some 6 minutes for one patient to go through the process. The unit also works from 6:00 am to 4:00 pm.

Stage 3
Consultation: There are six doctors who run six-hour shifts a day. Each doctor spends an average of 15 minutes seeing a patient. The community has been complaining about the turnaround period and blames it on the incompetence of the nurses to the extent that sometimes patients stay in queues for long hours and return home unattended.

Required:

i) With appropriate computations, evaluate and assess the bottleneck resource(s) at Pikambi Hospital. (6 marks)

ii) Suggest THREE (3) ways by which the turnaround time can be reduced at the hospital. (6 marks)

Answer

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Tags: Bottleneck Resources, Hospital Management, Process Improvement, Turnaround Time
Level: Level 2

Topic: Activity-based costing
Series: APR 2023

MA – Nov 2016 – L2 – Q1b – Activity-based costing

Explain the similarities and differences between activity-based costing and the traditional system of assigning overheads to products.

Question

Identify and explain briefly THREE similarities and TWO differences between activity-based costing and the traditional system of assigning overheads to products. (6 marks)

Answer

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Tags: Activity-Based Costing, Cost Drivers, Cost Pools, Overhead Allocation, Traditional Costing
Level: Level 2

Topic: Activity-based costing
Series: NOV 2016

MA – Nov 2024 – L2 – Q3b – Activity-Based Costing (ABC) in the Service Sector

Assessment of ABC's applicability in the service sector and identification of four units in healthcare where it can be applied.

Question

Required:

Answer

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Tags: Activity-Based Costing, Cost Control, Cost Drivers, Healthcare, Service Sector
Level: Level 2

Topic: Activity-based costing
Series: Nov 2024

MA – Aug 2022 – L2 – Q2a – Activity-based costing

This question asks for the calculation of activity rates and the cost per unit of product X using activity-based costing.

Question

The details of unit cost of products X, Y, and Z have been provided below:

Product	X	Y	Z
Demand (units)	1,200	2,800	3,000
GH¢	GH¢	GH¢	GH¢
Direct Material	70	55	40
Direct Labour	65	60	38
Variable Overheads	11	8	7
Fixed Overhead	32	24	20

Additional information:

The fixed overheads were absorbed at the rate of GH¢8 per machine hour.
The budgeted fixed overheads of GH¢165,600 can be analysed into the following cost pools with their respective percentages for apportionment:

Cost Pool Percentages (%)

Batch 20

Machinery 45

Customer service 25

Deliveries 10
The following also relates to the activities of the company:

Cost Pool	Percentages (%)
Batch	20
Machinery	45
Customer service	25
Deliveries	10

Product	X	Y	Z
Units in a batch	120	140	200
Quantities per delivery	100	280	250
Number of customers	50	180	220

Required:
i) Calculate the activity rates per batch, machine hour, customer service, and delivery.
(12 marks)

ii) Calculate the total cost of a unit of product X.
(3 marks)

Answer

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Tags: Activity-Based Costing, Cost Pools, Costing Techniques, Overhead Absorption, Unit Cost Calculation
Level: Level 2

Topic: Activity-based costing
Series: AUG 2022

MA – May 2018 – L2 – Q3c – Activity-Based Costing

Calculate the total overhead absorbed per unit using Activity-Based Costing and identify three types of cost controls.

Question

Dunning Limited has recently introduced an Activity Based Costing System and has
provided the following details for the month of January:

Answer

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Tags: Activity-Based Costing, Cost Control, Cost Pools, Overhead Absorption, Product costing
Level: Level 2

Topic: Activity-based costing
Series: MAY 2018

MA – May 2018 – L2 – Q3b – Activity-Based Costing

Identify three disadvantages of a standard costing system.

Question

Identify THREE disadvantages of a standard costing system.

Answer

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Tags: Activity-Based Costing, Cost Control, Cost Pools, Overhead Absorption
Level: Level 2

Topic: Activity-based costing
Series: MAY 2018

MA – Nov 2017 – L2 – Q3 – Activity-based costing

Calculate the prime cost, profit per unit using both absorption and activity-based costing, and comment on the differences and limitations.

Question

The following budgeted information for the period ended 31 December 2017 has been collated for each of the three products:

Product	Taya	Maya	Paya
Production and Sales (units)	8,750	4,000	6,000
Unit sales price (GH¢)	56	106	84
Direct materials	1.5kg	6kg	7kg
Direct labour:
– Machine Department (hours per unit)	1 hour	8 hours	6 hours
– Assembly Department (hours per unit)	4 hours	3 hours	1 hour
Direct expenses (GH¢ per unit)	2	6	3
Machine Department (machine hours per unit)	2 hours	5 hours	4 hours

The current costing system absorbs overheads to the Machine and Assembly Departments on the basis of a recovery rate of GH¢3.50 per machine hour and GH¢1 per labour hour respectively.

The following is an analysis of the overheads by department:

Department	Overheads (GH¢)
Purchasing Department	22,400
Production Set-up & Design Dept	34,500
Customer Service Department	32,600
Machine Department	123,000
Assembly Department	26,500

The Departmental Managers have provided the following additional information about operations in their departments:

Activity	Taya	Maya	Paya	Total
Number of set-ups	10	10	30	50
Number of customer orders	80	86	160	326
Number of purchase orders	30	32	50	112

The Machine Department is capital intensive, and the Assembly Department is labour intensive.

Required:

Answer

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Tags: ABC Limitations, Cost Drivers, Overhead Allocation, Prime Cost, Profit Analysis
Level: Level 2

Topic: Activity-based costing
Series: NOV 2017

MA – July 2023 – L2 – Q3a – Activity-Based Costing

This question involves calculating the cost driver rates and overhead cost per unit using the Activity-Based Costing (ABC) technique for three products under the 1D1F policy.

Question

The following three products are produced by a company under the “1D1F” policy with additional information provided.

Product	Cee	Dee	Gee
Units	4,000	6,000	4,800
Labour hours per unit	3	2.5	1.5
Number of units in a batch	400	500	600
Number of machine hours per unit	4	5	7

The annual overheads have been grouped under three headings:

Overhead Category	Amount (GH¢)
Labour related	45,000
Batch related	69,000
Machine related	120,000

Required:
i) Using the Activity Based Costing (ABC) technique, calculate the Cost Driver Rates for each group of overheads.
(6 marks)

ii) Calculate the overhead cost per unit of product “Cee” under the ABC technique.
(4 marks)

Answer

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Tags: Activity-Based Costing, Cost driver rates, Overhead Allocation
Level: Level 2

Topic: Activity-based costing
Series: JULY 2023

MA – May 2021 – L2 – Q3a – Activity-based costing

Calculate the product unit costs for Santo's product lines using activity-based costing.

Question

Below is data on Santo’s three product lines and overhead costs for the current accounting period:

	P1	P2	P3
Production volume (units)	7,500	12,500	4,000
Selling price per unit (GH¢)	47	80	68
Material cost per unit (GH¢)	18	25	16
Direct labour cost per unit (GH¢)	4	8	6.4
Materials movements (in total)	4	25	50
Machine hours per unit	0.5	0.5	0.2
Set-ups (in total)	1	5	10
The proportion of engineering work	30%	20%	50%
Orders packed (in total)	1	7	22

Activities overhead cost:

Machine maintenance and depreciation: GH¢390,000
Material receiving and handling: GH¢150,000
Engineering: GH¢100,000
Packing: GH¢60,000
Set-up labour: GH¢18,688
Total: GH¢718,688

Answer

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Tags: Activity-Based Costing, Cost Drivers, Overhead Allocation, Product costing
Level: Level 2

Topic: Activity-based costing
Series: MAY 2021

MA – April 2022 – L2 – Q3b – Activity-based costing

Differentiate between Activity-Based Budgeting and Incremental Budgeting, explain ABB processes, and discuss arguments for and against ABB.

Question

Required:

i) Differentiate between Activity-Based Budgeting and Incremental Budgeting. (3 marks)

ii) Explain the process in ABB. (3 marks)

iii) State TWO (2) arguments in favour and TWO (2) arguments against ABB. (4 marks)

Answer

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Tags: Activity Based Budgeting, Budgeting Process, Incremental Budgeting
Level: Level 2

Topic: Activity-based costing
Series: APR 2023

MA – April 2022 – L2 – Q2a – Activity-based costing

Evaluate the bottleneck resource at Pikambi Hospital and suggest ways to reduce turnaround time.

Question

Required:

i) With appropriate computations, evaluate and assess the bottleneck resource(s) at Pikambi Hospital. (6 marks)

ii) Suggest THREE (3) ways by which the turnaround time can be reduced at the hospital. (6 marks)

Answer

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Tags: Bottleneck Resources, Hospital Management, Process Improvement, Turnaround Time
Level: Level 2

Topic: Activity-based costing
Series: APR 2023

MA – Nov 2016 – L2 – Q1b – Activity-based costing

Explain the similarities and differences between activity-based costing and the traditional system of assigning overheads to products.

Question

Identify and explain briefly THREE similarities and TWO differences between activity-based costing and the traditional system of assigning overheads to products. (6 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Activity-Based Costing, Cost Drivers, Cost Pools, Overhead Allocation, Traditional Costing
Level: Level 2