business question 108
Answer one question
- Shamrock Printing produces a variety of diaries and notebooks that are sold only on the company’s website.The design of the diaries and notebooks is customised depending on the customers’ requirements.Historically, the company used a traditional overhead system based on machine hours to allocate overheads to products.The company recorded a loss for the first time, since it commenced trading ten years ago.The managing director, James Forrest is very concerned and has suggested that the company should increase the price of the notebooks and diaries by at least 25%.However, the management accountant has suggested that the problem could relate to overhead allocation, and argued the case for the adoption of an activity based costing system.
An initial activity analysis has been carried out.This shows that a customer first places the individual order and then discusses the design of the notebooks and diaries using emails.The artwork depends on the number of setups required to compile for each product.In addition, it is company policy to dispatch each order individually.Ordering costs and despatch costs are the same for each product ordered.
Financial information relating to the most recent trading period, and to the two last orders received has been provided below:
|
Overhead Costs |
|
|
Ordering costs |
£7,200 |
|
Design expenses |
£28,500 |
|
Artwork |
£17,250 |
|
Despatch costs |
£10,800 |
|
Activity drivers |
|
|
Total orders received |
48,000 |
|
Total design consultation emails |
356,250 |
|
Total artwork setups |
120,000 |
|
Total packets dispatched |
90,000 |
|
Total machine hours |
21,250 |
|
Details of orders received |
Order for 1 Notebook |
Order for 1 diary |
|
Order reference |
CFCNote |
CFCDiary |
|
Direct materials (paper, binding etc.) |
£1.86 |
£1.24 |
|
Direct labour |
£0.52 |
£0.68 |
|
Machine hours required |
0.20 |
0.30 |
|
Number of design consultations |
3 |
5 |
|
Number of artwork setups |
4 |
8 |
(a)Calculate the cost of each order received using:
- The existing overhead allocation method
- Activity based costing (ABC)
(22)
(b)Comment briefly on your answer in part (a) (i) and (ii) above
(5)
(c)With reference to the academic literature discuss why organisations may be reluctant to adopt activity based costing.
