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AASB 420 – Guide to answers
- Tiger Co operates an activity-based costing system and has forecast the following information for next year.
Cost Pool Cost Cost Driver Number of Drivers
Production set-ups £105,000 Set-ups 300
Product testing £300,000 Tests 1,500
Component supply and storage £25,000 Component orders 500
Customer orders and delivery £112,500 Customer orders 1,000
General fixed overheads such as lighting and heating, which cannot be linked to any specific activity, are expected to be £900,000 and these overheads are absorbed on a direct labour hour basis. Total direct labour hours for next year are expected to be 300,000 hours.
Tiger Co expects orders for Product AB1 next year to be 100 orders of 60 units per order and 60 orders of 50 units per order. The company holds no inventories of Product AB1 and will need to produce the order requirement in production runs of 900 units. One order for components is placed prior to each production run. Four tests are made during each production run to ensure that quality standards are maintained. The following additional cost and profit information relates to product AB!
Component cost: £1.00 per unit
Direct labour: 10 minutes per unit at £7.80 per hour
Profit mark up: 40% of total unit cost
(a) Calculate the activity-based recovery rates for each cost pool.
(b) Calculate the total unit cost and selling price of Product ZT3.
(c) Discuss the reasons why activity-based costing may be preferred to traditional absorption costing in the modern manufacturing environment.
(d) Explain the approach Tiger Co has chosen for it’s method of pricing and the reasons
why it may have done so
(e) Identify two other methods of deciding upon a selling price and explain what their
their advantages and disadvantages are.
Section B –
- Many firms still focus on profitability as their main measure of performance, despite increasing evidence that non-financial measures are often more important.
(a) Explain the arguments for using the profit measure as the all-encompassing measure of the performance of a business.
(b) Explain the limitations of this profit-measurement approach and of undue dependence on the profit measure.
(c) Explain the problems of using a broad range of non-financial measures for the short- and long-term control of a business.
- Holden plc is a large multinational organisation.
- Explain the term ‘decentralised structure’ and the advantages and disadvantages that Holden plc might experience if it adopts a decentralised structure
- Explain the term ‘transfer price’. What are the different methods that Holden could use to determine the price it uses to transfer goods or services from one division to another
- Discuss the problems that arise specifically when determining transfer prices where divisions are located in different countries
- Much of our management accounting theory in the UK was developed in the
1800’s and many of these techniques are still used in the UK today.
Other countries have developed other techniques and principles, which have also been proven to work, although they are very different to those used in this country.
The Japanese company Toyota developed a new theory, the Toyota Production System (TPS), which has been widely used not only in Japan but also in organisations worldwide.
(a) Explain what you understand by Kaizen costing and contrast it to Business Process Re-engineering (BPR)
(b) Discuss how the TPS systems is implemented
(c) There are four principles necessary for a system of TPS. Identify and explain them.