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Question :
'
The purpose of this report is to develop appropriate understanding of learner in the context of management accounting by considering cost calculation approaches with reference to current traditional costing system.
- Discuss cost per unit of basic and advance models with reference to current traditional costing system.
- Analyze cost per unit of the two models in the context of Sewing Easy ltd.
- Evaluate motive of overseas buyers in respect with buying advanced model in Sewing Easy ltd.
- Identify the reason behind same overheads and suggesting ways in the context of fluctuations.
- Discuss the benefits and limitations of Sewing Easy ltd.
Answer :
INTRODUCTION
Management accounting is the process of preparing reports and accounts which provides manager with accurate financial as well as statistical information for short-term decision making. In the context of business unit, management accounting ensures better planning and exerts control over the business organization. The present report is based on the case scenario of Sewing Easy ltd which mainly manufactures two models such as basic and advance. Now, with the motive to enhance customer base and maximize profit level business unit wants to explore operations at global level. Hence, in this, report will provide deeper insight about the cost of two concerned models under traditional and activity based costing method. Further, report also depicts the advantages and drawbacks associated with ABC system.
Calculating cost per unit of basic and advance models of sewing machines under current traditional costing system
 Traditional costing system
Overhead rate: Total manufacturing overhead / total labour cost
|
Particulars |
Basic model (Figures) |
Advance model (Figures) |
|
 |
 |
 |
|
Manufacturing overhead |
$250000 (refer W. N. 1) |
$451700 (refer W. N. 2) |
|
Labour cost (refer W. N. 3) |
240000 |
390000 |
|
Overhead rate |
$1.04 |
$1.16 |
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Working note 1: Computation of total indirect overheads for basic model
|
Particulars |
Figures (in $) |
|
Inspection |
$20000 |
|
Assembly |
$90000 |
|
Production Scheduling |
$105000 |
|
Machine set-up |
$35000 |
|
Total |
$250000 |
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Working note 2: Total indirect overhead cost assessment for advance model considering other operating expenses are enumerated below:Â
|
Particulars |
Figures (in $) |
|
Total indirect expenses as per basic model |
$250000 |
|
Add: selling and administration |
$140600 |
|
Add: interest expense |
$25200 |
|
Add: office rent |
$35900. |
|
Total |
$451700 |
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Working note 3: Computation of total labour cost
|
Particulars |
Basic model (Figures in $) |
Advance model (Figures in $) |
|
Units produced and sold |
1600 |
1500 |
|
Direct Labour cost per unit |
150 |
260 |
|
Total labour cost  |
240000 |
390000 |
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Calculation of total unit cost pertaining to basic and advanced model is as follows:
|
Basic model (Figures in $) |
Advance model (Figures in $) |
|
|
Direct material cost per unit |
325 |
560 |
|
Direct Labour cost per unit |
150 |
260 |
|
Overhead cost |
(150 * 1.04) = 156 |
(150 * 1.16) = 174 |
|
Unit cost |
631 |
994 |
Â
Computing cost per unit of the two models of sewing machines under Activity based Costing
Unit cost assessment as per activity based costing
|
Particulars |
Indirect / overhead costs |
Relevant cost driver |
Total of activities |
Indirect / overhead costs / related cost driver |
|
Inspection |
$20,000 |
Inspection |
950 |
$21.05 |
|
Assembly |
$90,000 |
Assembly |
8000 |
$11.25 |
|
Production Scheduling |
$105,000 |
Production Scheduling |
550 |
$190.91 |
|
Machine set-up |
$35,000 |
Machine set-up |
350 |
$100 |
Â
|
Particulars |
Total Indirect / overhead costs |
Total of activities |
Activity rate (A) |
Activity Usage (Basic model) (B) |
Activity Cost Assigned to basic model [C = (A * B)] |
Activity Usage pertaining to Advance model (D) |
Activity Cost Assigned to advance model E = (A * D) |
|
Inspection |
$20,000 |
950 |
$21.05 |
200 |
$4,210.53 |
750 |
$15,789.47 |
|
Assembly |
$90,000 |
8000 |
$11.25 |
4600 |
$51,750.00 |
3400 |
$38,250.00 |
|
Production Scheduling |
$105,000 |
550 |
$190.91 |
50 |
$9,545.45 |
500 |
$95,454.55 |
|
Machine set-up |
$35,000 |
350 |
$100.00 |
100 |
$10,000.00 |
250 |
$25,000.00 |
|
selling and administration |
$140600 |
$140600 * 36% = $50616 (refer w. n. 4) |
|||||
|
interest expense |
$25200 |
$25200 * 6% = $1512 (refer w. n. 4) |
|||||
|
office rent |
$35900. |
$35900 * 9% = $3231 (refer w. n. 4) |
|||||
|
Total overhead cost |
$75505.98 |
$229853 |
|||||
|
Per unit overhead cost |
$75505.98 / 1600 = $47.19 |
$229853 / 1500 = $153.24 |
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Working note 4:
|
Particulars |
Total Indirect / overhead costs |
Labour cost (advanced model) |
 |
|
selling and administration |
$140600 |
390000 |
36% |
|
interest expense |
$25200 |
390000 |
6% |
|
office rent |
$35900. |
390000 |
9% |
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