Accounting Business Reporting for Decision Making

488 Accounting: Business Reporting for Decision Making

The sales team have received an order for 1500 seats and produced them.

The order required the following:

Machine set-ups

Machine hours

Materials

Direct labour hours

7 set-ups

3250 machine hours

4250 kg

2750 hours

Required

a. Briefly comment on the importance of a costing system to Seats R Us. 4 marks

b. Draw a diagram showing the current costing system framework. 2 marks

c. Calculate the indirect cost rate for each cost pool identified in (b). 5 marks

d. Assign the indirect costs to the cost object identified in (b). 5 marks

e. Suppose that a single indirect cost rate based on machine-hours was used to allocate

indirect costs. Draw a diagram showing this costing system framework and contrast it

with the one in (b) above. Calculate the indirect cost rate. 3 marks

f. What amount of indirect costs was applied to the cost object using the indirect cost rate

based on machine-hours? 2 marks

g. Briefly comment on any differences in your answer to (d) and (f) above. 4 marks

Self-evaluation activities

11.1 Trans Australia Airlines has three service departments:

1. ticketing


2. baggage handling


3. engine maintenance.
   The service department costs are assigned by air kilometres, and are allocated to two operational
   departments (domestic flights and international flights) to determine the full cost of the operating
   departments.
   The following data relate to the allocations.

Budgeted data

Costs Air km

Ticketing

Baggage handling

Engine maintenance

Domestic flights

International flights

$4 000 000

2 000 000

6 000 000

5 000 000

20 000 000

Required

Allocate the service department costs to the operational departments, using air kilometres as the

allocation.

SOLUTION TO 11.1

Step 1: Determine indirect cost rate

As there is only one cost driver, the allocation formula will be:

Total service department costs/Total air km

($4 000 000 + 2 000 000 + 6 000 000)/(5 000 000 + 20 000 000 air km) = $0.48 per air km

Step 2: Allocate indirect costs to two operating departments

Domestic 5 000 000 air km × $0.48 = $2 400 000

International 20 000 000 air km × $0.48 = $9 600 000