Texts: GWS is a company which produces three types of garden ornaments (gnomes, windmills, and sundials) for general sale. The company is structured such that each garden ornament is a profit center. Each of the profit centers has a manager who is responsible for the performance of that center. The company currently uses a traditional absorption costing approach to account for overheads, but the Managing Director is considering the introduction of Activity Based Management (ABM).
The three types of ornaments produced by the company are first machine molded into the required shape and then finished by hand. The following information is available for the forthcoming period:
Gnomes Windmills Sundials
Sales and production (‘000s units) 60 30 40
Selling price per unit (R) 30 40 20
Direct cost per unit (R) 10 15 5
Molding Department (machine hours/unit) 2.0 4 1.5
Finishing Department (labor hours/unit) 1.5 2 1.0
The company currently allocates overheads to the garden ornaments using the following overhead absorption rates:
Molding Department R4 per machine hour
Finishing Department R3 per labor hour
However, because the Managing Director wishes to introduce ABM, the overhead costs have been categorized into the following cost pools:
Cost pool R’000
Molding 570
Set up 272
Finishing 437
Purchasing 155
Administration 336
The following information is also available for the period:
Hours
Molding machine hours 300,000
Finishing labor hours 190,000
Gnomes Windmills Sundials
Sales orders 15,000 6,000 9,000
Purchase orders 7,800 12,200 4,800
Set ups 950 260 150
Required:
Prepare two separate profit statements for the forthcoming period which clearly show the profit/loss for each type of ornament and the total profit/loss for the company using:
3.1. Traditional absorption costing (10)
3.2. Activity Based Costing (15)