# QUESTION 2 (28 marks) Instructions (for Q2 only) :

QUESTION 2 (28 marks)

Instructions (for Q2 only) :

Based on the following case study information, build a spreadsheet modelThe spreadsheet model should include a “Data Input Section” (whereby allProgram your spreadsheet to perform all necessary calculations. Do not “hard

code” any amounts, use the addition, subtraction, multiplication, division

operations or any other specialised formulas.

(iv) Print a copy of the spreadsheet with the answers / results to the problems.

(v) Print a copy of the spreadsheet showing the formulas used therein.

Case study information :

Timmy Inc. produces 2 types of products, “Ronny” and “Sonny”. It expects to produce 70,000 units of Ronny and 60,000 units of Sonny. Total direct material cost in 2015 is expected to be \$55.00 per unit for Ronny and \$100.00 per unit for Sonny.

Timmy expects to pay wages of \$20.00 per direct labour hour. Ronny requires 2 direct labour hours per unit, whilst Sonny requires 1 direct labour hours per unit to complete. Other manufacturing costs are considered as overhead. The estimated total annual overhead for the year is \$3,500,000. Currently, Timmy allocates its overheads based on direct labour hours.

The company is considering the use of activity-based costing (ABC) system to allocate all its overheads based on the following information :

Moulding                                   Quality control                             Shipping

(Machine hours)

(No of inspections)

(No of customer orders)

Ronny        36,000                                                    20                                                500

Sonny        44,000                                                    30                                               1,500

Timmy estimates that Moulding related costs amounts to \$2,800,000; Quality control related costs amounts to \$150,000; and Shipping related costs amounts to \$550,000.

Required :

(a) Calculate the total cost of each product (assuming that the expected no. of units are produced) using the traditional costing system.

(b) Calculate the total cost of each product (assuming that the expected no. of units are produced) using the activity-based costing system.

(c) Suppose the company decides to use ABC to set their selling price. What would be the minimum selling price per unit for each product if the company requires a gross profit margin of 45% for all products?

(d) Assume that Moulding cost increased by 20% and Shipping cost decreased by \$150,000. Calculate the total cost of Ronny only (assuming that the expected no. of units are produced and the total driver units remains the same) using the activity-based costing system.

(Parts (a) to (d) – 21 marks)

(e) Distinguish between an activity’s “trigger” and its root cause (give an example of each). The product line manager commented “Although in the past this product has been very profitable, based in our recent reports, it appears that we might need to drop this product”, with reference to this statement, explain why a new product costing system might be required. There are many challenges when implementing ABC / ABM. Human behaviour is one such challenge. Explain why human behaviour might affect the successful implementation of ABC / ABM. (Word limit : 500).