Reference no: EM131336756

This assignment will assess the following learning outcomes:
- LO1 Analyse costs in business organisations contexts
- LO2 Apply cost estimation techniques in a range of business situations
- LO3 Evaluate cost and revenue information and costing methods for managerial decision-making
- LO5 Effectively communicate cost and revenue information in a decision making context.

ANSWER ALL THE QUESTIONS

Question 1

Bloomberg Company assembles three types of motorbike at the same factory: the 100cc Hero Honda, the 250cc Unicorn and the 1000cc Passion. It sells the motorbikes throughout the world. In response to market pressures Bloomberg Company has invested heavily in new manufacturing technology in recent years and, as a result has significantly reduced the size of its workforce.

Historically, the company has allocated all overhead costs using total direct labour hours, but now is considering introducing activity-based costing (ABC). Bloomberg Company's accountant has produced the following analysis.

	Annual Output (units)	Annual Direct Labour Hours	Selling Price(OMR per unit)	Raw material cost(OMR per unit)
Hero Honda	2000	200000	4000	400
Unicorn	1600	220000	6000	600
Passion	400	80000	8000	900

The three cost drivers that generate overheads are:

Deliveries to retailers - the number of deliveries of motorbikes to retail showrooms
Set-ups - the number of times the assembly line process is re-set to
accommodate a production run of a different type of motorbike

Purchase orders - the number of purchase ordersThe annual cost driver volumes relating to each activity and for each type of motorbike are as follows:

	Number of deliveries to retailers	Number of set-ups	Number of purchase orders
Hero Honda	100	35	400
Unicorn	80	40	300
Passion	70	25	100

The annual overhead costs relating to these activities are as follows:

	OMR
Delivenes to retailers	2400000
Set-up costs	6000000
Purchase orders	3600000

All direct labour is paid at 5OMR per hour. The company holds no stocks. At a board meeting there was some concern over the introduction of activity-based costing.

1. The finance director argues: 'I very much doubt whether selling the Passion is viable but I am not convinced that activity-based costing would tell us any more than the use of labour hours in assessing the viability of each product.'

2. The marketing director argued: 'I am in the process of negotiating a major new contract with a motorbike rental company for the Hero Honda model. For such a big order they will not pay our normal prices but we need to at least cover our incremental costs. I am not convinced that activity-based costing would achieve this as it merely average costs for our entire
production.'

3. The managing director argued: 'I believe that activity-based costing would be an improvement but it still has its problems. For instance, if we carry out an activity many times surely we get better, costs are fixed and do not vary either with labour hours or any other
cost driver.'

4. The chairman argued: 'I cannot see the problem. The overall profit for the company is the same no matter which method of allocating overheads we use. It seems to make no difference to me.'

Sentosa is expecting an upsurge in demand and considers that the excess capacity is temporary. Therefore, even though there is sufficient direct labour capacity to produce 50 000 sweaters, Sentosa intends to retain the temporary excess supply of direct labour for the expected upsurge in demand. A leisure company located overseas has offered to buy 15 000 sweaters each month for the next three months at a price of OMR 20 per sweater. The company would pay for the transportation costs and thus no additional marketing and distribution costs will be incurred. No subsequent sales to this customer are anticipated. The company would require its company logo inserting on the sweater and Sentosa has predicted that this will cost OMR1.000 per sweater. Should Sentosa accept the offer from the company? Justify your answer with calculation, evaluation and explanation.