A revision presentation for Advanced Management Acounting exam of Coventry University

1. KISS
By Ahmed A. Zaidi, CMA

2. Sharing a Lunch
 3 friends eat out at a restaurant
 They order
1. chicken platter : $20 (cost pool 1)
2. salad : $7 (cost pool 2).
 How should cost be split up
 Equally?!

3. Activity = eating
 The fitness freak (F) munches only salad (2/3)
 The glutton gorges (G) only chicken (2/3)
 The in-between (I) eats both (1/3 x both)
How should the cost be allocated fairly?
G (2/3 x 20= $13.33)
F (2/3 x 7= $4.67)
I (1/3 x 20 +1/3x7 = 6.67+2.33= $9)

4. A Free Lunch?!
 Cross- subsidization – paying somebody else’s cost
 Someone is under-costed and over-costed
 Under-costed G (13.33-7=$6.33)
 Over-costed F (7-4.67=$2.33)
 Solution: ABC – costing according to activity
 Activity  cost

5. ABC problems
 Keeping activity records ((counting mouthfuls -Cost
Driver ?!!)
 Identifying the cost drivers (cause & effect
relationship)
 More than one cost pool
 More than one cost driver

6. CU© Exam Practice –Resit 2014 Q
 Kevin and Ernie Ltd - road construction company
 Uses DL £ to absorb overheads- Profit Markup 60%
 Cost of labour of job £600,000
 Current annual budget as follows
£000s
Sales Revenue 125,000
Direct Materials 30,000
Direct Labour 60,000
Overhead Costs 20,000
Operating Income 15,000

7. Absorption Costing
 Step 1: Calculate the Overhead Absorption Rate (OAR)
 OAR= Total Overhead cost/ Total Direct Labor (DL)
 Step 2: Multiply OAR by the DL cost of the job
Job Overhead absorbed = 0.33 x £600,000= £200,000
 Step 3: Add Direct costs and Profit to get Selling Price
OAR £
total overhead costs 20,000,000
total direct labor cost 60,000,000
OAR 0.33
Direct Labour cost 600,000
Overhead Cost 200,000
Total Abs cost 800,000
mark up (0.6x 800,000) 480,000
Total Abs price 1,280,000

8. ABC
 Step1: Calculate each activity overheads & Cost Driver
Rate CDR = Activity Cost Pool/ Cost Driver used
Total
Overheads
Total
co CDR
20,000,000
Specialist equip
hire 0.45 9,000,000 8,000 £1125/ day
Agency labour 0.25 5,000,000 20000 £250/ hr
Insurance 0.15 3,000,000 300
£10000/
employee
Admin support 0.1 2,000,000 5000 £400/ hr
Surveyor 0.05 1,000,000 1000 £1000/hr
20,000,000

9. ABC (Contd)
 Step 2: Apply the CDR to cost drivers used in this job
 CDR xCost driver used in road= Overhea absorbed
CDR
CDR CDR used road Total
Specialist equip
hire 1125 50 56,250
Agency labour 250 750 187,500
Insurance 10000 20 200,000
Admin support 400 125 50,000
Surveyor 1000 6 6,000
499,750

10. ABC (Contd)
ABC Overhead cost 499,750
Direct Labor 600,000
Total ABC cost 1,099,750
Mark up (60% x 1099,750) 659,850
Total ABC Selling Price 1,759,600
 Step 3: Add ABC Overhead cost to DL to get Total ABC
Cost. Then apply markup % to calulate ABC price
 Calculate the difference between Absorption & ABC SP
 The contract is being under-costed by £479,600 by
Absorption costing compared to ABC
 Compare it with cost of ABC recordkeeping & analysis

11. ABM Benefits
Source: assignmentpoint.com