BAO 2204: 2 nd Assignment The current costing system that is presumed to being used is the Job Costing system: Cost Driver: Machine Hours According to the calculations that are specified in the first spreadsheet attachment, it can be assumed that the Job Costing system is the current costing system that Pilot Plant is allocating to the Low Voltage Group. As the above diagram suggests, this system currently comprises of 3 cost pools which are: Variable Overhead, Fixed Overhead & Labour, as well as Direct Materials. The main cost driver for these cost pools is the Machine hours, being 2700 hours. Under the Job Costing system, the calculation of the predetermined overhead rate has played an important part in the calculation of these cost pools, as the amount of \$157. 41 was the catalyst for calculating the Product Unit cost, the Direct Materials Cost, the Variable Overhead, as well as the Fixed Overhead & Labour costs. In this situation, the assumption of the use of the Job Costing system is appropriate when a good or service is produced as an individual job.

The main advantages with the Job Costing system is that: - the units of a certain job are easy to identify; - A lot of the manufacturing costs or the cost of producing a service can be directly traced to a particular job; and - Individual goods or services have very different characteristics and costs. As a result, the use of the Job Costing system was appropriate for establishing the predetermined overhead rate, which is equal to the estimated overhead costs divided by the number of machine hours. Predetermined Overhead Rate = Estimated Overhead Costs / Machine hours. = \$425, 000 / 2700 = \$ 157. 41 per Machine hour The calculation of the Direct Materials Cost pool was generated by using the cost of the materials which are used in the machines, which consist of: NCPE-0600 & Resin being \$0.

10 per kilogram, Kisuma & Flame Retardant being \$0. 12 per kilogram, as well as Compound Z & Anti-Oxidant being \$0. 14 per kilogram, which enabled a total Direct materials cost of \$512 to be calculated. The Labour costs consisted of 1 manager being paid at \$45, 000 per year, as well as 6 technicians being paid at \$30, 000 each, at a total of \$180, 000. The Fixed Costs consisted of \$200, 000 per year. As a result, these costs formed the Fixed Overhead & Labour Cost pool, which was calculated at a total of \$425, 000.

The Product Unit cost pool consisted of the predetermined overhead rate being \$157. 41 per machine hour being multiplied by 20 hours, which comprised of the run of Machine 1, being equal to \$3148. 20. Given that Pilot Plant produces 250 kg per hour and the total amount of kilograms for this job is 5000 kg, it would mean that Machine 1 would take 20 hours to complete.

This was calculated by dividing 5000 kg by 250 kg for Machine 1. As a result, this has enabled a variable cost of \$25 per hour being charged to Machine 1. This resulted in the Variable overhead cost for Machine 1 of \$500, to be calculated. Therefore, the assumption of the use of the Job Costing system has enabled the current cost pools to be calculated with very little difficulty, and the total cost of the sample run that is charged to the Low Voltage Group being \$4160. 20. The overall evaluation of the Job Costing system is according to the manufacturing context, products are manufactured in separate and distinct jobs.

This normally leads to manufacturing costs and activities normally varying, and therefore, a number of jobs can operate during a particular period. As far as the calculation of unit costs is concerned, costs are traced to every job, which means that the total cost of a job is divided by the number of units that are produced in the job inorder to determine the unit cost of that particular job. Job Costing tends to be accurate, mainly because the costs of a certain job, are traced back to that job. Even though the Job Costing system is normally an accurate and convenient system for Pilot Plant, there is room for improvements to be implemented. An example could be that that Pilot Plant could have used a different cost base as a cost driver, instead of machine hours. Despite the number of machine hours used and the cost of direct materials being traced back to the cost pools, it will be likely that the product unit cost is not correct.

This could be due to the volume of machine hours that are used, does not provide an accurate cost measure creation for product unit costs. Therefore, the accuracy of unit costs can be determined by implementing a more elaborate and perhaps expensive cost system, which will enable costs to be directly traced back to their cost pools. These will be discussed later on, as this particular additional cost must be compared with the benefit of having more accurate unit costs, to use in making decisions concerning the cost of the sample run being charged to the Low Voltage Group. The Calculations are as follows from Question 1: Fixed Costs Labour Costs \$200, 000 per year \$45, 000 per year \$180, 000 per year 6 technicians @ \$30, 000 per year Main Cost Driver Machine hours: 2700 (denominator Volume) Predetermined Overhead rate = Overhead Costs/ /Machine hrs Overhead Costs = SUM (A 2: B 3) \$425, 000/2700 = \$157. 41 per machine hr Fixed Overhead & Labour \$425, 000 Variable Machine time \$25 20 hrs = \$500 Product Unit Costs Predetermined Overhead rate 20 hrs \$157. 41 20 hrs = \$3148.

20 Direct Materials Cost NCPE-0600, Resin: \$0. 10 (5000 90%) = \$450 per kg Kisuma, Flame retardant: \$0. 12 (5000 8%) = \$48 per kg Compound Z, Anti-oxidant: \$0. 14 (5000 2%) = \$14 per kg Total = \$512 Total Cost of Sample Run = \$4160. 20 The new costing system that is going to be used will be the activity-based costing (abc) system: - Capacity kg per year & Product costs will be the new cost drivers. An alternative costing system that can be used by Pilot plant could be the activity-based costing (abc) system, and as the above diagram suggests, the cost pools are different to those that were used in the assumption of the previous use of the job costing system.

Under the activity-based costing system, it comprises of cost pools such as Direct Labour and Indirect fixed costs, which have been broken up from the old Fixed Overhead & Labour cost pool, that was used in the old system. Instead of machine hours being used as the cost driver, the new cost drivers under the abc system are Product costs and Capacity kg. per year, which is the level of production that is achieved for all 3 machines. However, the main focus will only be on calculating the cost of operating one of the machines in the new system. The remaining cost pools that will be used in the new calculations are indicated in the diagram above will all be driven by the product cost that was achieved in the old system and the capacity kg.

per year, as their new denominators. As the above diagram and new calculations will suggest, the activity-based costing system is more complicated and refined compared to the job costing system, as it improves the tracing of most indirect costs to Machine 1, by recognizing the different levels of activities that lead to a resource consumption of indirect costs, while the job costing system does not. This has resulted in the Direct Labour and Indirect fixed cost pools being created, as the abc system produces more accurate cost estimations. The main definition of the activity-based costing system, is that it allocates overhead costs to a product that is based on the cost of activities that are required, inorder to produce the product. This means that the allocation bases act as cost drivers, unlike in the job costing system, where the total machine hours of 2700 was used as the main cost driver. Therefore, this would be a suitable alternative costing system to use as the abc system, provides an estimation of more accurate product costs for firms that have a number of products and services, as well as in firms where products and services use the overhead activities in a lot of different ways.

Therefore, this particular system is am ore refined costing system, as it has the ability to convert indirect costs into direct costs, by separating the total overhead costs into different cost pools, which is why that Pilot plant should use the abc system, in which a discreet unit of work that an organization is able to define inputs, resources and outputs that will be used. The calculations of the abc system are as follows: Indirect Fixed Costs: 200, 000/Capacity Kg. per year 200, 000/1, 000, 000 = 0. 2 5000 kg Total = \$1000 has been assigned to the cost pool Direct Materials: \$512 Variable Overhead: \$500 Stock Arrangement: \$30, 000 (1 technician) /Capacity Kg. per year \$30, 000/1, 000, 000 = \$0. 03 \$0.

03 5000 kg Total = \$150 has been assigned to the cost pool Direct Labour: \$45, 000 \$150, 000 (5 technicians \$30, 000) \$45, 000/1, 000, 000 = \$0. 045 5000 kg = \$225 \$150, 000/1, 000, 000 = \$0. 15 5000 kg = \$750 Total = \$975 has been assigned to the cost pool Weigh-up Costs: \$30, 000 (1 technician) /2000 technician hrs a year = \$15 16 technician hrs Total = \$240 has been assigned to the cost pool for Machine 1 Cleanup hours: 4 hrs \$15 = \$60 2 technicians Total = \$120 per batch, is the amount that is paid to clean-up Machine 1 Product Costs: \$3148. 20 Total Cost = \$6645. 20.