ACa6111_Fall 2013_Assignment 2 Case2:_Kiku Yamamoto_ABC Costing

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ACa6111_______________________Fall 2013___________________________Assignment
2

Case2: ABC Costing

Kiku Yamamoto is the controller of
Watanabe, Inc., an electronic controls company located in Osaka. She recently
attended a seminar on activity-based costing (ABC) in Tokyo. Watanabe’s
traditional cost accounting system has three cost categories: direct materials,
direct labor, and indirect produc­tion costs. The company allocates indirect
production costs on the basis of direct labor cost. The fol­lowing is the 20X0
budget for the automotive controls department (in thousands of Japanese yen):

Direct materials
Â¥
60,000

Direct labor 35,000

Indirect production costs 24,500

Totalcost
Â¥119,500

After Ms. Yamamoto attended the seminar,
she suggested that Watanabe experiment with an ABC sys­tem in the Automotive
Controls Department. She identified four main activities that cause indirect
pro­duction costs in the department and selected a cost driver to use as a
cost-allocation base for each activ­ity as follows:

Activity Cost-Allocation Base Predicted 20X0 Cost (Â¥000)

Receiving

Direct materials cost

Assembly

Number of control units

Quality control

QC hours

Shipping

Number of boxes shipped

TOTAL

Â¥
4,800

13,800

1,800

4,100

Â¥24,500

In20X0 the Automotive Controls Department expects to
produce 92,000 control units, use 600 quality control hours, and ship 8,200
boxes.

1.
Explain how Watanabe, Inc., allocates its indirect production costs
using its traditional cost sys­tem. Include a computation of the allocation
rate used.

2.
Explain how Watanabe, Inc., would allocate indirect production costs
under Ms. Yamamoto’s proposed ABC system. Include a computation of all the
allocation rates used.

3.
Suppose Watanabe prices its products at 30% above total production cost.
An order came in fromNissan for 5,000 control units. Yamamoto estimates
that filling the order will require¥8,000,000of direct materials cost and¥2,000,000 of direct
labor, It will require 50 hours of QC inspectiontime and will be shipped in 600 boxes,it. Compute the price charged for the
5,000 control units if Watanabe uses its traditional cost accounting system.

b. Compute the price charged for the 5,000
control units if Watanabe uses the ABC system pro­posed by Ms. Yamamoto.

4. Explain why costs are different in the two
costing systems. Include an indication of which costs you think arc most
accurate and why.

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