Footprint Ltd. is a shoe manufacturer in Aberdeen, which produces regularly three types of shoes:...

Question

Footprint Ltd. is a shoe manufacturer in Aberdeen, which produces regularly three types of shoes: Casual shoes, trainers and boots. Considering a normal production, the details of a period of production for each one these products are as follows.

Product	Labour hours per unit	Machine hours per unit	Materials per unit (£)	Volume unit
Casual shoes	1	1	25	650
Trainers	1.5	2	17	1,100
Boots	2	4	30	5,000

Currently, the company uses traditional costing system to calculate costs per unit. The overheads are allocated on machine hour basis, using a rate per machine hour equivalent to £35. Direct labour per hour costs £17.

The business is planning an expansion abroad and so, the unit costs of each product will be extremely relevant to a market research. You recently arrived as a management accountant in this business. After looking at the cost for each product, you realised that overhead costs are very significant and you are concerned that the company would miss opportunities to export the range of products if the costs are not allocated properly.

You decided to visit the factory floor to understand in details the production process. During your visit, you identified relevant cost pools along the manufacturing process. You estimated that each of these cost pools consumed differently overhead costs. You calculate an approximate distribution of overheads as follows.

%

Cost relating to maintenance	30%
Costs relating to machinery	25%
Costs related to purchasing	10%
Cost relating to quality control	35%
Total production overheads	100%

You also realised that the three different products consumed differently the resources provided by the above-mentioned cost pools. You did an extensive observation of the production process. After checking the information you collected, you found the cost driver to each cost pool and how much each product consumed from them.

Product	Number of maintenance hours	Number of purchase orders	Number of quality inspections
Casual shoes	55	15	170
Trainers	70	20	125
Boots	350	65	550
Total	475	100	845

You learned in Management Accounting 2 module that the product unit costs could vary depending on the overhead allocation. You were very interested on Activity Based costing you think this system could help to provide a more accurate data on cost per unit. You feel that you can help managers to take a more informed decision on the business expansion if you compute the costs using Activity-Based costing.

1.	Using traditional costing system as the basis for assigning manufacturing overhead cost to products, do the following:
	a) Calculate the unit costs (showing your calculations for direct labour, direct materials and overheads) for each product (casual shoes, trainers and boots).
	b) Compute the total overheads for the period per product.
2.	Using activity-based costing system as the basis for assigning manufacturing overhead cost to products, do the following:
	a) Compute the total of machine hours for the period.
	b) Calculate the amount of manufacturing overhead per each cost pool and the overhead rate per each cost driver.
	c) Calculate the overheads (showing your overhead calculations to each: maintenance, machinery, purchasing and quality inspection) and by product (casual shoes, trainers and boots).
	d) Calculate the unit costs (showing your calculations for direct labour, direct materials and overheads) for each product (casual shoes, trainers and boots).
3.	Based on traditional costing and activity-based costing, do the following:
	a) Compute the difference of unit costs between the two above mentioned costing systems and for each product (casual shoes, trainers and boots).
	b) Calculate the total overheads per unit and for the period allocated to each product using the two above mentioned costing systems.
	c) Briefly explain the impact of the treatment of manufacturing overheads on the differences between the unit overhead and total overhead costs for the period.
4.
	a) Discuss whether machine hours are the appropriate basis for assigning manufacturing overhead to the company’s range of products (casual shoes, trainers and boots).
	b) Use your calculations from tasks 1-3 to help identify and explain the key drivers of manufacturing overhead at the company. Recommend which costing system to apply.
	c) Identify and briefly discuss three advantages of using ABC.
	d) Identify and briefly discuss three disadvantages of using ABC.

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Pranjal · Accepted Answer

GN46416_Revised/GN46416_Revised.docx
MANAGERIAL ACCOUNTING
Table of Contents
Question 1:	3
Part a)	3
Part b)	3
Question 2:	4
Part a)	4
Part b)	4
Part c)	4
Part d)	5
Question 3:	6
Part a)	6
Part b)	6
Part c)	6
Question 4:	8
Part a)	8
Part b)	8
Part c)	8
Part d)	9
References:	10
Question 1:
Part a) 
The unit costs for each of the three products namely casual shoes, trainers and boots, are briefly shown herein:
		Calculation of Unit Cost of Three Brands
		Brands
		Casual shoes
		Trainers
		Boots
		Total
		Particulars
		Amount £
		Amount £
		Amount £
		Amount £
		Material cost per unit
		25
		17
		30
		NA
		Labour cost per unit
		17
		25.5
		34
		NA
		Overhead cost per unit
		35
		70
		140
		NA
		Total overhead cost
		22,750
		77,000
		700,000
		799,750
Table 1: Calculation of Unit Cost of Three Brands (Traditional Costing System)
The unit costs for materials have already been provided in the case study, the unit costs for labour have been computed considering the labour hour required for each unit and corresponding hourly charge. 
Part b)
Similarly, for overhead unit costs, the hourly charge has been multiplied by the overhead per hour. Total overhead costs for the period per product have also been highlighted in the preceding table as well. Total charges come to be £799,750. 
Question 2:
Part a)
The total machine hours for the period are computed to be 22,850. The break-up of that is shown in Table 3 below. Out of the total hours, 650 hours are attributable to casual shoes, 2,200 hours for trainers and rest 20,000 hours for boots. 
Part b)
The overhead distribution including the cost pool and cost drivers are shown herein.
		Distribution of Overhead
		Particulars
		Share
		Amount £
		Cost relating to maintenance
		30%
		239,925
		Costs relating to machinery
		25%
		199,938
		Costs related to purchasing
		10%
		79,975
		Cost relating to quality control
		35%
		279,913
		Total production overheads
		100%
		799,750
Table 2: Distribution of Overhead
From the above table, it shows that the manufacturing overhead for cost pool relating to maintenance may be computed to be GBP 239,925. Similarly, the same for the machinery cost pool is computed as GBP 199,938 (rounding off has been ignored). Purchasing order cost pool holds overhead of GBP 79,975 and lastly, the quality control cost pool consists of total overhead of GBP 279,913 (rounded off). 
The respective shares of each cost pool are given in the above table, which totals to 100%. 
Part c)
Total overhead and product wise overhead is computed as below:
		Calculation of Overhead Allocation among Three Brands
		Brands
		Casual shoes
		Trainers
		Boots
		Total
		Particulars
		Amount £
		Amount £
		Amount £
		Amount £
		Allocation based on maintenance hours:
		
		 
		
		 
		Hours consumed
		55
		70
		350
		475
		Overhead
		27,781
		35,357
		176,787
		239,925
		Allocation based on purchasing:
		
		 
		
		 
		No. of orders placed
		15
		20
		65
		100
		Overhead
		11,996
		15,995
		51,984
		79,975
		Allocation based on quality control:
		
		 
		
		 
		No. of quality inspections occurred
		170
		125
		550
		845
		Overhead
		56,314
		41,407
		182,192
		279,913
		Allocation based on machinery
		
		 
		
		 
		Hours consumed
		650
		2,200
		20,000
		22,850
		Overhead
		5,688
		19,250
		175,000
		199,938
		Total overhead cost
		101,778
		112,010
		585,962
		799,750
Table 3: Calculation of Overhead Allocation among Three Brands
Part d)
The unit costs for materials and labour may remain fixed under ABC. However, the overhead costs per unit may get changed and the same may be shown herein.

Footprint Ltd. is a shoe manufacturer in Aberdeen, which produces regularly three types of shoes: Casual shoes, trainers and boots. Considering a normal production, the details of a period of...

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