Question 4
ICAN
•
2025
•
PERFORMANCE MANAGEMENT
•
mixed
Case Stimulus
Chukwumah Nigeria Limited manufactures and sells three products X, Y and Z. The company is recently considering the introduction of an activity-based costing approach to facilitate efficient cost allocation, as well as achieve improvement in cost accuracy and reduction. The new approach will use two direct costs categories (direct materials and direct labour) as well as five indirect cost pools which represent the five activity areas. The prior product costing system uses the two direct cost categories and a single indirect cost pool where overheads are allocated using direct labour hours. The following information is provided for the next period:
Product Product Product
X Y Z
Production and sales (units) 120,000 75,000 30,000
Direct material cost N190 N180 N160
Direct Labour Hours 6 8 7
Machine hours 4 8 9
Number of production runs 15 30 75
Number of component receipts 45 75 360
Number of production orders 45 30 75
Direct labour is paid at N8 per hour. Variable overhead is paid at N34 per unit for Product X, N44 per unit for Product Y and N38 per unit for Product Z.
Fixed Overhead Costs in the period are expected to be as follows:
N Cost Driver
Set up 1,260,000 Production Runs
Machine 8,100,000 Machine Hours
Goods inwards 2,520,000 Company Receipt
Packaging 1,800,000 Production Order
Engineering 1,620,000 Production Order
N15,300,000
Additional Information
{
"label": "Supporting information 1",
"content": "| | ₦ | Cost Driver |\n|----------------|-----------|---------------------|\n| Set up | 1,260,000 | Production Runs |\n| Machine | 8,100,000 | Machine Hours |\n| Goods inwards | 2,520,000 | Company Receipt |\n| Packaging | 1,800,000 | Production Order |\n| Engineering | 1,620,000 | Production Order |\n| **Total** | **₦15,300,000** | |"
}
{
"label": "Supporting information 2",
"content": "| | Product X | | Product X | | Product Z |\n|----------|-----------|----------|-----------|----------|-----------|\n| Prob. | ₦ | Prob. | ₦ | Prob. | ₦ |\n| 0.5 | 300 | 0.6 | 350 | 0.5 | 450 |\n| 0.3 | 360 | 0.3 | 400 | 0.4 | 440 |\n| 0.2 | 390 | 0.1 | 420 | 0.1 | 430 |"
}
{
"label": "Supporting information 3",
"content": "| | Product X | Product Y | Product Z |\n|----------------------|-----------|-----------|-----------|\n| Production and sales (units) | 120,000 | 75,000 | 30,000 |\n| Direct material cost | ₦190 | ₦180 | ₦160 |\n| Direct Labour Hours | 6 | 8 | 7 |\n| Machine hours | 4 | 8 | 9 |\n| Number of production runs | 15 | 30 | 75 |\n| Number of component receipts | 45 | 75 | 360 |\n| Number of production orders | 45 | 30 | 75 |"
}
Requirements
(
a
)
Calculate the unit costs of each product using:
(
b
)
The company considered the pricing of the three products where sales prices have remained uncertain as shown in the table below:
Compute the expected unit sales prices for the three products and the total profit or loss for each product that will arise from the implementation of the ABC costing approach and the traditional costing method.
(
c
)
State reasons why activity based costing approach may be preferred to traditional absorption costing approach in modern manufacturing environment.
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About This Question
This is
Ican
2025
Performance Management
Question 4.
It is one of the
mixed
questions from the
2025
Ican
Performance Management
examination.