A business manufactures refrigerators for domestic use. There are three models; A, B, and C. The models, their quality and their prices are targeted at varying markets: Accounting Assignment, OUM, Malaysia

Question 3

A business manufactures refrigerators for domestic use. There are three models; A, B, and C. The models, their quality and their prices are targeted at varying markets. Product costs are computed using a blanket overhead rate. Products absorb overheads on the basis of labour hour. Generally, prices are set according to cost plus 25%. The following information is given:

The budgeted overheads for the business for the year are RM4,410,000. Meanwhile, direct labour is RM10 an hour. The business is currently facing rising competition, especially from imported goods. Consequently, the selling price of X is reduced to a level that produces very low profit margin.

To address this problem, an activity-based costing (ABC) approach is proposed. The overheads have been analysed and it is found that these are grouped around main business activities of machining (RM2,780,000), logistics (RM590,000), and establishment costs (RM1,040,000). It is maintained that these costs could be allocated based respectively on cost drivers of machine hours, material orders and space, to reflect the use of resources in each of these areas. After analyzing, the following proportionate statistics are produced as shown below:

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