ACC2005 Process Costing and Activity Based Costing System Assessment Answer

1. Process Costing and Activity Based Costing System 

1. Apply the costing system in use at CRQ to calculate a cost per procedure. 

Answer:

The cost driver is remuneration. Thus all the indirect are allocated to the services on the basis of remuneration.

Cost per procedure is as follows:

2. Evaluate the costing system as a basis for charging patients and for monitoring performance. 

Answer:

The organization uses single cost driver method to allocate the indirect costs. The single cost driver is technicians’ remuneration. The system is not very appropriate because not all costs are necessarily driven by the technicians’ remuneration. There might be different cost drivers for different costs. The cost will not be allocated appropriately (ORCSRice University, n.d.) 

In order to allocate cost more appropriately it is important to find out the appropriate cost driver for the cost. The administration cost will be related to the duration of each procedure. The maintenance cost is driven by the no of procedures carried out. Cleaning cost to the pot-procedure cleaning time and utilities cost can be related to the consumables cost in each department more appropriately. 

3. Recommend a costing system that is capable of addressing issues raised in your evaluation. Note: apply the system that you have recommended. 

Answer:

Another method to allocate the indirect overheads more appropriately is the Activity Based Costing System. The ABC costing system uses different cost drives for different cost pools and distributes cost based upon the most appropriate cost driver. ABC system is more process driven (ORCSRice University, n.d.)

The cost using the ABC system is calculated as follows:

The system allocates the cost more accurately and can help in better pricing of services and evaluation of performance. However the success of the method depends upon selection of the right cost driver.

4. ‘There’s no reason for me to get excited about the choice between the weighted-average and FIFO methods in my process-costing system. I have long-term contracts with my materials suppliers at fixed prices.’ Do you agree with this statement made by a plant controller? Explain your answer. 

Answer:

No I do not agree with the statement because materials is the only one small part of cost in process. Conversion cost which includes the labor and overheads is also there. The use of weighted average and FIFO method does not affect only the cost of material but also the cost of units produced and transferred.

 FIFO method calculates the cost of units in the process based upon the total cost incurred during the period and the total no of equivalent units completed in the period. The cost of beginning work in process units is assigned to the first completed units and then to the equivalent units introduced  and worked on during the period. The weighted average method calculates the average cost per unit by adding the total transferred - in cost to the process by the total transferred - in units completed. Thus the methods costs the units completed and transferred out and ending work –in process at the average cost of units completed (Horngren, C.T., 2009 pp. 735). 

Thus despite the same material cost the two methods of costing will give different cost of units produced.

Question 2 Process Costing

(a) Calculate the following: 

1. The equivalent units of production for materials and conversion costs 

2. The unit costs of production for material and conversion costs 

3. The assignment of costs to units transferred out and in process at the end of the accounting period

(b) Prepare a production report for the month of July for the basketballs.