Workshop-7-Qs Warwick Accounts

Warwick Business School IB9AXO: Foundations of Financial and Management Accounting
WEEK 8 - (WORKSHOP 7): QUESTIONS
Q1 WORKSHOP QUESTION
a) Would you expect the following companies to use a job order or process cost accounting
system? Explain.
 Powergen, producing electricity.
 Golden-Eye Jewellers, making custom jewelry for celebrities.
 Tayler and Nelsen, a Law Firm.
 Supershot, an advertising agency (e.g., for an advertising campaign by Pepsi)
 Barclays Bank (e.g., for the cost of checking account withdrawals)
b) What is meant by Underapplied Overhead, by Overapplied Overhead?

c) 'Activity-Based Costing is the wave of the present and the future. All companies should
adopt it.' Do you agree? Explain.
Required:
Which of the following statements are false?

a) Not all companies use activity-based costing systems.
b) Activity Based Costing (ABC) system cannot be recommended because ABC is not that
different from the traditional costing system.
c) Activity- Based Costing System is the wave of the present and future. All companies
should adopt it.
d) ABC system only applies to manufacturing companies.
Q4 PRACTICE QUESTION
The controller for Alabama Cooking Oil Co. is evaluating whether the company should adopt
activity-based costing or keep its current volume-based costing system. As part of the
evaluation, she established the following overhead cost pools and cost drivers:
Budgeted Estimated
Overhead Cost Pool Overhead Cost Driver Cost Driver Level
Machine setups $143,000 no. of setups 110 setups
Material handling 124,800 no. of barrels 7,800 barrels
Quality control 316,200 no. of inspections 1,020 inspections
Other overhead cost 172,500 no. of machine hrs 11,500 machine hrs
In addition, she wanted to see the impact of using the different costing systems on an order.
Production provided the following information for an order of 800 barrels of cooking oil:
Machine setups 10 setups

Material handling 780 barrels
Quality inspections 104 inspections
Machine hours 980 machine hours
Required:
a) Utilizing traditional volume-based costing, how much overhead is assigned to the order
based on machine hours as a single cost driver?
b) Utilizing ABC, how much total overhead is assigned to the order?
c) Advise management on which product costing system they should adopt and why. Be
sure to include the advantages and limitations of the system chosen.
Q5 PRACTICE QUESTION
Tuti Fruity Stores Ltd is considering extending its supermarket in North Carolina and wishes to
assess the profitability of its product lines: soft drinks, fresh produce and packaged food.
Details of the last half year’s trading are as follows:
Soft Drinks Fresh Produce Packaged Food

£ £ £
Sales 317,400 840,240 483,960
Cost of Sales 240,000 600,000 360,000
Total store support costs (all costs other than cost of goods sold) were £360,000 and these are
presently allocated to product lines in proportion to cost of goods sold in order to arrive at
operating income and product line margins.
The CEO (Chief Executive Officer) is confused by the margins disclosed by this method, he
exclaims: “I don’t believe soft drinks have such low profitability. Many of our drink suppliers
are now responsible for delivery direct to the shelf, minimizing our involvement in these
processes and most soft drinks are bought in multi-packs which reduces hassle at the checkout.
Is our costing system misleading us?”
Tuti Fruity Stores Ltd is therefore considering more accurate methods of tracing store support
costs to product lines using ABC (Activity Based Costing) methodology and has called you in to
offer advice. The supermarket chain is also expanding into other services for its customers
including financial services and management is interested in the relevance of ABC to such
operations.
Additional information:
Store support activities for the half year have been analysed and costed, resulting in the
following details:
Activity Description of Activity Total Costs Cost Driver

£
1. Bottle returns Returning of empty bottles to store 4,800 Direct tracing to
Soft drink line
2. Ordering Placing of orders for purchases 62,400 Purchase orders
3. Delivery Physical delivery and receipt of 100,800 Deliveries

merchandise
4. Shelf-stocking Stocking of merchandise on store 69,120 Hours of stock time

shelves and ongoing restocking
5. Customer Assistance provided to customers, 122,880 Items sold

support including check out and bagging ______
360,000
During the half year the following transaction levels were recorded:
Soft Drinks Fresh Produce Packaged Food
Number of purchase orders placed 144 336 144

Number of deliveries received 120 876 264
Hours of shelf-stocking time 216 2,160 1,080
Items Sold 50,400 441,600 122,400
Required:
a) A calculation of product line profits and margins using the present costing system
(which allocates store support costs on the basis of cost of goods sold).
b) A calculation of revised product line profits and margins using ABC methodology.
c) A comparison of the resulting figures explaining the reasons for the differences, and
your advice to management regarding the usefulness of these figures as an aid to
making decisions, such as product pricing and the best utilisation of the additional
selling area provided by the supermarket extension.

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Warwick Business School IB9AXO: Foundations of Financial and Management Accounting

WEEK 8 - (WORKSHOP 7): QUESTIONS

b) What is meant by Underapplied Overhead, by Overapplied Overhead?

Which of the following statements are false?

Machine setups 10 setups

Soft Drinks Fresh Produce Packaged Food

Activity Description of Activity Total Costs Cost Driver

2. Ordering Placing of orders for purchases 62,400 Purchase orders

3. Delivery Physical delivery and receipt of 100,800 Deliveries

4. Shelf-stocking Stocking of merchandise on store 69,120 Hours of stock time

5. Customer Assistance provided to customers, 122,880 Items sold

Soft Drinks Fresh Produce Packaged Food

Number of purchase orders placed 144 336 144

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