- Part A: Case Study (30 marks)
You will be provided with a case study that requires you to apply activity based
costing techniques. You will then need to discuss the derived costings in giving
advice to a client. No word limit.
Part B: Article (20 marks)
You will be given a statement for discussion. You are to write a fully referenced
discussion in the format of an article.
It should have headings and subheadings but does not need an abstract. Use the
Harvard method of referencing and ensure the bibliography style is consistent with the
citation style. Do not number items in the bibliography. You are expected to use at
least five sources from the academic accounting literature. Examples of these sources
are given below. Maximum 1000 words (excluding references).
Be aware that any evidence of plagiarism will be investigated and disciplinary
action taken. See the sections on plagiarism on Learnline.
Part A: Case Study
HCI Pharmaceuticals manufactures an over-the-counter allergy medication called
Breathe. HCI is trying to win market share from Sudafed and Tylenol. HCI has
developed several different Breathe products tailored to specific markets. For
example, the company sells large commercial containers of 1,000 capsules to health-
care facilities and travel packs of 20 capsules to shops in airports, train stations, and
hotels.
HCI’s controller Sandra Dean has just returned from a conference on activity-based
costing. She asks Keith Yeung, foreman of the Breathe product line, to help her
develop an activity-based costing system. Dean and Yeung identify the following
activities, related costs, and cost allocation bases:
Activity Estimated indirect
activity costs ($)
Materials handling 190,000 Kilos 19,000 kilos
Packaging 400,000 Machine
Quality assurance 112,500 Samples 1,875 samples
Total indirect costs 702,500
A commercial container of Breathe product line uses a total weight of 8,000 kilos,
used 1,200 machine hours, and required 200 samples to produce 2,500 containers. The
standard travel-pack line has a total weight of 6,000 kilos, used 400 machine hours,
and required 300 samples to produce 50,000 travel packs. HCI produced 2,500
commercial containers of Breathe and 50,000 travel packs.
REQUIRED:
1. Compute the cost allocation rate for each activity.
2. Use the activity-based cost allocation rates to compute the activity costs of the
commercial containers and the travel packs. (Hint: First compute the total
activity costs allocated to each product line, and then compute the cost per
unit.)
3. HCI’s original single-allocation-base cost system allocated indirect costs to
products at $300 per machine hour. Compute the total indirect costs allocated
to the commercial containers and to the travel packs under the original system.
Then compute the indirect cost per unit for each product.
4. Compare the activity-based costs per unit to the costs from the original system.
How have the unit costs changed? Explain why the costs changed as they did.
5. Explain the advantages of ABC system over the traditional costing method?
Part B: Article
Your employer has a few clients who do not understand what the benefits of using
cost volume profit (CVP) techniques might be and whether it is appropriate for them
to use it – could they expect to get more useful information by the use of CVP
analysis? They are aware that it is mostly used and recommended for businesses to
keep track of their performance and wonder if it would help theirs.
While these matters can be explained to client managers, they may have difficulty
explaining it to others or the managers in the business may change and their
replacements face the same issues. Therefore, in addition to meeting with the client
your boss wants you to prepare an article that can be handed to the clients.
The article will explain two matters: (1) the assumptions of CVP analysis and (2) the
benefits and issues of using CVP.
