Q.4 Application of Activity-Based Costing Nina Audrey started Nina Interiors, a niche furniture brand, 10 years ago. She

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Q.4
Application of Activity-Based Costing
Nina Audrey started Nina Interiors, a niche furniture brand, 10
years ago. She ran the business as a sole proprietorship. While she
has 50 skilled carpenters and 5 sales people on her payroll, she
has been taking care of the accounting by herself. Now, she intends
to offer 40% of the ownership to public in next couple years and is
willing to make changes and has hired Tracy as a management
accountant to organize and improve the accounting systems.
Nina Interior's total budgeted manufacturing overheads cost for
the current year is Ugx 81,240,000 and budgeted
total labor hours are 20,000. Alison the financial accountant has
been applying traditional costing method during the whole 10 years
period.
Nina Interior's sofas includes the 2-set, 3-set and 6-set
options. State House recently placed an order for 150 units of the
6-set type. The order is expected to be delivered in one-month
time. Since it is a customized order, State House will be billed at
cost plus 25%.
Tracy is not a fan of traditional costing system. She believes
that the benefits of activity-based costing system exceeds its
costs, so Tracy has sat down with Aaron Mason, the chief engineer,
to identify the activities which the firm undertakes in its sofa
division.
Next, Tracy calculated the total cost that goes into each
activity, identified the cost driver that is most relevant to each
activity and calculated the activity rates.
The results are summarized below:
Activity
Amount (Ugx)
Relevant Cost Driver
Activity level
Production of components
20,310,000
Machine hours
25,000
Assembly of components
15,200,000
Number of labor hours
20,000
Packaging
2,130,000
Units
5,000
Shipping
6,000,000
Units
5,000
Setup costs
3,4000,000
Number of setups
240
Designing
1,200,000
Designer hours
1,000
Product testing
2,400,000
Testing hours
500
Once the order was ready for packaging, Alison gave you a
summary of total cost incurred, and a statement of activities
performed (also called the bill of activities) as shown below:
Order No: 1502021
Customer: State House
Units: 150
Type: 6 Set
Amounts in $
Cost of direct materials
Ugx 5,000,000
Cost of purchased components
Ugx 3,500,000
Labor cost
Ugx 15,60,000
Activity
Relevant Cost Driver
Activity Usage
Production of components
Machine hours
320
Assembly of components
Number of labor hours
250
Packaging
Units
150
Shipping
Units
150
Setup costs
Number of setups
15
Designing
Designer hours
70
Product testing
Testing hours
22
Required;