Accounting Business Reporting for Decision Making

494 Accounting: Business Reporting for Decision Making

Variable cost Fixed cost

Materials

Other

$320 000

$480 000

$

$

640 000

1 280 000

Each product uses 50 per cent of the variable material costs. The other costs are allocated as

follows: variable costs based on machine time (Alpha 160 000 hours and Beta 80 000 hours) and

fixed costs allocated evenly to both products. The management of Screen Industries desires an

annual profit of $160 000 per product.

Required

a. Calculate the total cost for each product.

b. What price should be charged for each product?

11.30 Contrasting the use of an activity cost driver with a volume-based cost driver   LO1, 3, 4

Better Pet Care Services is located in rural Victoria, and treats farm animals and domestic pets.

Providing veterinary care to the farm animals requires travel to the individual farms in the area,

while veterinary care to domestic pets is usually conducted in the surgery located in the town.

One of the partners, Dr Al Sashon, recently attended a small business management course in

Melbourne. He was particularly interested in the discussions on activity-based analysis, and how

the technique could better identify the costs of providing different services. His partner, Dr Jack

Russell, prefers to keep the accounting records simple, and would prefer to maintain the current

system of allocating indirect costs based on professional labour hours. However, the partners

did reach an agreement to undertake a comparison of the current indirect cost allocation and the

proposed activity cost focus. The following information was collected.

Activity cost

pool Cost driver

Estimated

cost

Total expected

use of cost

driver

Use of cost driver*

Farm

animals

Domestic

pets

Medication Prescriptions $128 000 8 000 3 600 4 400

Surgery Operations 130 000 1 600 400 1 200

Travel Kilometres 56 000 56 000 52 000 4 000

Consultations Appointments 66 000 6 000 1 200 4 800

Administration Professional hours 60 000 10 000 4 000 6 000

Kennel services# 80 000

$520 000

*Expressed in units of measure of the driver.

#Kennel services will now be directly traced as records will be kept of pets using this practice.

Direct costs are $300 000 for farm animals and $200 000 (prior to inclusion of kennel services)

for domestic pets.

Required

a. Identify the cost objects for the analysis.

b. Calculate the indirect cost allocation for farm animals and domestic pets using existing methods.

c. Determine the activity cost rates for each activity.

d. Assign the activity cost to the farm animals and the domestic pets using the activity rates cal-

culated in (c) above.

e. Calculate the full (total) cost for both farm animals and domestic pets under both the tra-

ditional approach and the activity approach. (Hint: include kennel services as a direct cost

under the activity approach.)

f. Compare the results in (e) — can you explain any differences?

g. What recommendations would you make to the partners in relation to the appropriate costing

system for the service?