Hi, I really need your help. I have a cost accounting question that I need to submit in a few hours. I have attached the file and you only need to answer the 3 question on ABC bank. Please answer all parts of question 3. The price is $20 dollars and is negotiable.
Class 4: Cost allocation, job costing and ABC
1. Kingsway Ltd.
You have been asked to suggest a method of deducing the full cost of various production orders of
Kingsway Ltd. This method will be used as a basis for setting prices. The production orders vary greatly
in size and nature from one to the next.
The following information has been taken from the budget for the forthcoming financial year: Direct labour hours:
Machine hours 100,000 hours
90,000 hours Manufacturing costs:
Machine maintenance and repairs
Factory heat and light
Lubricants and cleaning materials
Indirect labour £
1,520,000 The business is not departmentalised for accounting purposes.
All direct labour is paid the same hourly rate.
1. Explain the difference between direct and indirect costs. Give an example of each. Can a given
cost item be both a direct cost and an indirect cost? Why do managers distinguish between
direct costs and indirect costs?
2. Calculate two feasible overhead rates for the year.
3. Prepare full costings for Order No 101 using each of the rates calculated in (2) (that is, two
The cost sheet for Order No 101 shows the following:
Direct labour hours 4,000 hours Machine hours 1,900 hours. 4. State briefly which of the two bases of overheads you prefer and why. How might you improve on
the two possible costs that you derived in (3) by taking a slightly different approach? 13 2. Edgware Insight
Edgware Insight provides outsourcing services and advice to both government and corporate clients.
For costing purposes, Edgware Insight classifies its departments into two support departments
(Administrative/ Human Resources and Information Systems) and two operating departments
(Government Consulting and Corporate Consulting). For the first quarter of this year, Edgware Insight
incurs the following costs in its four departments:
Administrative/Human Resources (A/HR) £50,000 Information Systems (IS) £280,000 Government Consulting (GOVT) £875,600 Corporate Consulting (CORP) £1,245,200 The actual level of support relationships among the four departments for the first quarter of this year
was: USED BY SUPPLIED
IS A/HR IS GOVT CORP - 35% 40% 25% 20% - 20% 60% The Administrative/Human Resource support percentages are based on headcount. The Information
Systems support percentages are based on actual hours of computer time used.
1. Allocate the two support department costs to the two operating departments using the
(a) Direct method
(b) Step-down method (allocate Administrative/Human Resources first)
(c) Step-down method (allocate Information Systems first).
Compare and explain the differences in the support department costs allocated to each operating
2. What criteria could determine the sequence for allocating support departments using the stepdown method? What criterion should Edgware Insight use if government consulting jobs require
the step-down method for tendering purposes?
3. Why do conventional product costing systems allocate support department costs first to the
operating departments before assigning them to individual jobs?
Clearly show your workings. 14 3. ABC Bank (collected for marking)
ABC Bank is a multinational bank with headquarters in London. It has three major divisions:
investment, retail, and commercial banking. During the financial crisis and the subsequent economic
downturn the bank has come increasingly under pressure to reduce cost and to determine
competitive prices. To meet that objective, ABC bank is developing an activity-based cost system for
its cashier department which is part of the retail banking division. A task force has identified five
different activities: (1) the processing of deposits, (2) the processing of withdrawals, (3) answering
customer inquiries, (4) selling negotiable instruments, and (5) the balancing of cash registers. By
tracing the costs of operating the cashier department to these five activities, the task force has
compiled the following information regarding support costs and activities for one of its branches: Support Activity
Selling negotiable instruments
Balancing cash registers Estimated Cost
1,950 The task force has developed the following list of activities which are undertaken in connection with
the “Retirement Plus Account”, a current account product marketed to retired persons:
Support Activity Average monthly volume per current account Processing deposits 3.5 Processing withdrawals 6.5 Answering inquiries 3.1 Selling negotiable instruments 1.0 Required:
a) Calculate the total monthly support costs for the “Retirement Plus Account” product. [4 marks] b) How can the information from the activity-based costing system guide improvements in
operations and decisions at ABC Bank? Explain and discuss with reference to the calculations you
made above. [8 marks] c) Why should managers worry about product over- or undercosting? Explain and discuss. [4 marks] d) ‘Increasing the number of indirect-cost pools is guaranteed to sizably increase the accuracy of
product, service or customer costs.’ Do you agree? Explain and discuss. [4 marks] Your discussion in (c) and (d) should use the case of ABC bank as an illustrative example. Clearly state
any assumptions you make. 15
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