Answer Happy

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.
app.claned.com < 3 14 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.
4 4 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 Cost of direct materials Ugx 5,000,000 Cost of purchased components Labor cost Ugx 3,500,000 Ugx 15,60,000 Activity Relevant Cost Driver Production of components Machine hours Number of labor hours Assembly of components Packaging Shipping Units Units Setup costs Number of setups Designing Designer hours Product testing Testing hours Required: Activity Usage 320 250 150 150 15 70 22
4 (4 *** Units 150 Shipping Setup costs 15 Designing Number of setups Designer hours Testing hours 70 Product testing 22 Required; a) Help management of Nina interiors to calculate the total costs using activity-based costing. (16 marks) b) Why would Tracy prefer Activity-based costing rather than the Traditional costing method? (05 marks) c) Are there limitations to the traditional costing method? (04 marks) Total, 25 marks End Ra