Delta Ltd: activity-based costing and throughput accounting

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• Machine hour absorption rate = $270,000 / 4,000 hours = $67.50 an hour.
• Overhead per unit of X = 3,000 x 67.50 / 5,000 = $40.50.
• Overhead per unit of Y = 1,000 x 67.50 / 1,000 = $67.50.
• ABC rates: machining $30 a machine hour, setups $1,125 a setup, inspections $200 an inspection.
• ABC overhead for X = 20 x 1,125 + 100 x 200 + 3,000 x 30 = $132,500, which is $26.50 a unit.
• ABC overhead for Y = 60 x 1,125 + 200 x 200 + 1,000 x 30 = $137,500, which is $137.50 a unit.
• The total overhead allocated under ABC equals $270,000 (a check on the workings).
• Cost pools and drivers are identified correctly for each activity.

Marks counted: 0 of 8

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• Product X: total cost under machine hours = 15 + 40.50 = $55.50, and under ABC = 15 + 26.50 = $41.50. At a price of $60, profit per unit is $4.50 under absorption and $18.50 under ABC.
• Product Y: total cost under machine hours = 25 + 67.50 = $92.50, and under ABC = 25 + 137.50 = $162.50. At a price of $150, profit per unit is $57.50 under absorption and $-12.50 under ABC.
• Under machine hour absorption, X earns a small profit and Y a large one, but under ABC X is much more profitable and Y makes a loss.
• The change arises because Y uses many setups and inspections for a small volume, but these costs were hidden by absorbing on machine hours.
• The managing director's view that X is only marginally profitable is not supported by the ABC figures, so a decision to drop X or to put effort into Y would be wrong.
• Delta Ltd should review the pricing of Y, which is underpriced given the activities it uses, and consider reducing setups and inspections or raising the price.
• ABC is more accurate here because overheads are significant and products consume activities differently, but it costs more to set up and some costs have no clear driver.

Marks counted: 0 of 6

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• Cost per factory (bottleneck) hour = $240,000 / 3,000 = $80.
• Return per bottleneck hour for X = (150 - 40) / 1 = $110.
• Return per bottleneck hour for Y = (220 - 60) / 2.5 = $64.
• Throughput accounting ratio for X = 110 / 80 = 1.38.
• Throughput accounting ratio for Y = 64 / 80 = 0.80.
• Product X has a ratio above 1, so it earns more than the cost of using the bottleneck, and it should be given priority.
• Product Y has a ratio below 1, so it does not earn enough for the bottleneck time that it uses, and unless it can be improved (higher price, lower materials or less bottleneck time), it should be limited.
• Throughput accounting treats labour and overheads as fixed in the short term and focuses on the scarce resource, which is a different view from ABC.

Marks counted: 0 of 6