The big management reporting challenge: Costs and budgets

Posted by PM | on Fri, 06/08/2010 - 10:00  1437  4 comments

Wrap your brain around our latest question from CIMA for a chance to win a bottle of wine.

This week, the Chartered Institute of Management Accountants (CIMA) has sent us the question below. Read through the text and then post your answers to the question below. We'll publish the answers on this thread next week and the member judged to have given the best answer will win a bottle of wine.

The following information relates to the budget for the year ahead:

Continued...

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Don't copy from an excel solution!

My New Name | Fri, 06/08/2010 - 12:27 | Permalink
Costs allocated by production run Product S Product T
Purchase orders per year 100 100
Number of production runs per year 20 5
Purchase orders per run 5 20
Purchase order cost each 60 60 £300k annual cost / 5,000 annual orders
Purchasing cost per run 300 1,200
Set up cost per run 1,000 1,000 £235k annual cost / 235 production runs
Purchasing cost per run 300 1,200 from above
Cost per run per run 1,300 2,200
Average run size units per run 250 4,000 Annual qty / production runs
Set up cost £/unit               4.00               0.25 Cost per run / average run size
Purchasing cost £/unit               1.20               0.30 Cost per run / average run size
Total Costs allocated by production run               5.20               0.55 £/unit
Costs allocated by unit Product S Product T
Machine hours per unit 2 1
Cost per machine hour £/hour 3 3 £285k annual cost / 95,000 hours
Machinery cost per unit £/unit               6.00               3.00
Summary
Product S Product T
Machinery cost               6.00               3.00
Costs allocated by unit               6.00               3.00
Set up cost               4.00               0.25
Purchasing cost               1.20               0.30
Costs allocated by production run               5.20               0.55
Production overhead cost per unit             11.20               3.55
The relatively small batch size of product S is the prime reason for the higher production overhead
cost allocation per unit.

Yikes

bonnere | Fri, 06/08/2010 - 12:35 | Permalink

Workings

Machinery Costs per hour = 285000/95000 = £3/hr

Set Up costs per run = 235000/235 = £1000/run

Purchase Ordering costs per order = £60/order

S = 5000/20 = 250 units per run

S = 5000/100 = 50 units per order

T = 20000/5 = 400 units per run

T = 20000/100 = 200 units per order

Answer

S

Machinery Costs 2 x £3 = £6.00

Set Up Costs 1000/250 = £4.00

Purchase Order 60/50  =  £1.20

Total  S                            £11.20

T

Machinery Costs 1 x £3  = £3.00

Set Up Costs 1000/4000= £0.25

Purchase Order 60/200  = £0.30

Total  T                            £3.55

 

 

 

Thank you AAT intermediate costing, technician here i come (in s

tick n bashy | Fri, 06/08/2010 - 13:02 | Permalink

Machinery costs

285000 / 95000 = £3

S = 3 * 2 * 5000 = £30000

T = 3 * 1 * 20000 = £60000

 

Set up costs

235000 / 235 = £1000

S = 1000 * 20 = £20000

T = 1000 * 5 = £5000

 

Purchase orders

300000 / 5000 = £60

S = 60 * 100 = £6000

T = 60 * 100 = £6000

 

Totals

S = 30000 + 20000 + 6000 = £56000

T = 60000 + 5000 + 6000 = £71000

 

Single unit cost

S = 56000 / 5000 = £11.20

T = 71000 / 20000 = £3.55

 

Matt

 

 

 

 

freelance32's picture

CIMA-ABC

freelance32 | Wed, 11/08/2010 - 14:15 | Permalink

Product S £5.98 and T £2.99. 

Set up cost to a certain extent inflates the price and I  would say is not  relevant in ABC as the question only shows a budgetted set up and no allocation to products specifically, given there are many products, the allocation via a % of total machine costs/hours may not be accurate, product s may have a set up cost not in the same ratio as T, T may not even need a set up change from S, nor are the P/Os relevant.  If marginal costing then the directly attributable costs would be included, and the whole production cost breakdown would inc set ups and p/os.  But from a purely production element - that which actually produces units, then its machine hours only.  [No data re down time/capacity etc]

As the information is to some extent limited, then my assumption would be to concentrate on the production runs.  If you think about it, once unit s or t has run 1 unit, then the set up cost in fact is irrlevant, hence to some extent set up being a sunk cost.  Every subsequent unti runs at production cost only.  This is why ABC, or even marginal costing will strip out unessary costs and get a basic cost driver in place.  This is your lowest production cost per unit and from there you can build in other cost drivers - but as said - production of each unit with no other relevant issues [ set up, capacity, down time, by product etc].

And if set up is required - then ok, cost allocated would be higher - but to me its almost a direct overhead to add on as an additional cost layer.