ACFI2003 Management Accounting

Task:

Newcastle Industrial Manufacturers (NIM) manufactures parts that are used in large earthmoving trucks typically used in the mining industry. It specialises in the production of 3 parts: A-12, P-37 and K-51. NIM has produced K-51 in high volume for many years, however demand has steadily declined over the past 2 years. NIM recently lost one of its major customers for the part as they were able to buy an equivalent part for 10% less form a foreign manufacturer. Recent analysis by the marketing manager indicates it is very difficult for NIM to meet current competitor pricing for the K-51 equivalent parts. A-12 and P-37 are more recent additions to NIM’s product offerings and significantly more complex to manufacture than the K-51. Both the A-12 and P-37 require special tools and set-ups for each batch. NIM believes it has to set a premium price for both of these parts to account for the complexities involved in their manufacture.

Required:

1. Calculate the total unit cost of the three products using NIM’s traditional method of cost allocation.

2. Calculate the total unit cost of the three products using activity-based costing.

3. Compare the costs calculated in 1 and 2 above. Explain the difference in cost figures. You must explain how well the overhead rates reflect the overhead costs incurred and consumed, drawing on information from the case facts to illustrate your answer. Which method of allocation would you recommend NIM management use? See appendix for guide as to how question will be marked.

4. Explain (in your own words) the advantages and disadvantages of using an ABC system.