Transaction drivers count how often an activity is performed

Transaction drivers count how often an activity is performed

Answer Question No. 1, then attempt any other THREE questions.
1. Transaction drivers count how often an activity is performed.
Duration drivers represent the amount of time required to perform an activity.
Intensity drivers directly charge for the resources used each time an activity is performed.
Also, a weighted index approach might be used to simulate an intensity driver.
a. Give an example of each of the four types of drivers described
above. b. Explain when each of the four types of drivers should be
used.
c. For each of the first three types of drivers, explain the assumptions about the activity and
the object of the activity.
d. For each of the following activities identify a transaction driver, a duration driver, and
an intensity driver.
Machine maintenance
Machine setup Quality
control Material
ordering Production
scheduling Warehouse
expense Engineering
design

Attempt any THREE questions of the following
2. Describe the steps in the PDCA cycle.
3. Describe some of the drawbacks of using the operating budget as a control device.
4. What role has the increasingly competitive business environment played in the
development of management accounting?
5. Explain how traditional cost systems, using only unit level cost drivers, distort product costs.

SectionB

60 marks

Read the following FOUR cases, then answer the required questions after each case.
Case 1
Profit sharing Knight Medical Devices makes devices and equipment that it sells to hospitals.
The organization has a profit-sharing plan that is worded as follows:
The company will make available a profit-sharing pool that will be the lower of the following two
items:
1. 40% of income before taxes in excess of the target profit level, which is 18% of net assets, or
2. $14 million.
The individual employee is paid a share of the profit -sharing pool equal to the ratio of that
employee’s salary to the total salary paid to all employees.

Required
(a)
If the company earned $90 million of earnings before taxes and had net assets of $200
million, what would be the amount available for distribution from the profit -sharing pool?
(b )
Suppose that Bob Knight’s salary was $136,000 and that total salaries paid in the company
were $50 million. What would Bob’s profit share be?

Sunshine, Inc. sells a single product. The company’s most recent income statement is given below.
Sales (4,000 units)

$120,000

Less variable expenses

(68,000)

Contribution margin

52,000

Less fixed expenses

(40,000)

Net income

$ 12,000

Required:
a. Contribution margin per unit is
b. If sales are doubled to $240,000,
total variable costs will equal
c. If sales are doubled to $240,000,
total fixed costs will equal
d. If Sunshine is past the breakeven point and
10 more units are sold, profits will increase by
e. Compute how many units must be sold to break even.
f. Compute how many units must be sold
to achieve a profit of $20,000.

The Crandon Mill has two divisions. The Cutting Division prepares timber at its sawmills. The
Assembly Division prepares the cut lumber into finished wood for the furniture industry. During the
year, the Cutting Division prepared 60,000 cords of wood at a cost of $660,000. All the lumber was
transferred to the Assembly Division where additional operating costs of $ 6 per cord were incurred.
The 600,000 boardfeet of finished wood were sold for $2,500,000.

Required:
a. Determine the operating income for each division if the transfer price from Cutting to Assembly
is at cost, $11 a cord.
b. Determine the operating income for each division if the transfer price is $9 per cord.
c. Since the Cutting Division sells all of its wood internally to the Assembly Division, does the
manager care what price is selected? Why? Should the Cutting Division be a cost center or a pro fit
center under the circumstances?

Abbot Corporation produces 200,000,000 units of product X and 80,000,000 of product Y with the
following costs and machine hours.
Product X

Product Y

Total

Direct costs
(material plus labor)

$18,000,000

Environmental
support
Nonenvironmental
support
Total support

Total machine hours

$8,000,000

28,000,000

44,000,000

58,000,000

$44,000,000

$86,000,000

$130,000,000

20,000,000

12,000,000

32,000,000

Required
a. Determine total product cost per unit for each product using a traditional costing system with
machine hours as the cost driver.
b. Determine total product cost per unit for each product using an activity based costing system.
Use the number of units as the cost driver for each activity.

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