Page 267 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes 7. Sparkling Housecleaning provides housecleaning services to its clients. The company uses
an activity-based costing system for its overhead costs. The company has provided the
following data from its activity-based costing system.

Activity Cost Pool Cleaning Job support Client support Other Total
Total Cost $645,576 $129,546 $ 20,900 $110,000 $906,022
Total Activity 72,700 hrs 5,400 jobs 760 clients Not applicable
The “Other” activity cost pool consists of the costs of idle capacity and organization-
sustaining costs.
One particular client, the Lotus family, requested 31 jobs during the year that required a
total of 62 hours of housecleaning. For this service, the client was charged $1,620.
Using the activity-based costing system, compute the customer margin for the Lotus family.
Round off all calculations to the nearest whole cent.
8. Assume the company of question 7 decides instead to use a traditional costing system in
which all costs are allocated to customers on the basis of cleaning hours. Compute the
margin for the Lotus family. Round off all calculations to the nearest whole cent.
9. “One of the key points in target based costing is that the target cost is the dependent
variable.” What is so important about the statement? Analyse and answer.
10. “A fundamental shift in performance often needs a radical change in the way an organisation
is managed.” Comment.
11. “Historically, target costing has been developed and used in manufacturing companies.”
Does this imply that target based costing is less/not useful for non-manufacturing
companies?
12. A master budget is the summary budget incorporating its component functional budgets
and which is finally approved, adopted and employed. Discuss.

Answers: Self Assessment

1. activity drivers 2. Primary activity
3. cost drivers 4. cost of resource
5. activity 6. target cost
7. market price, sold 8. development cycle
9. profi tability 10. Resource Drivers
11. Target Costing 12. Experience Curve
13. True 14. False
15. True
14.7 Further Readings

Books David W. Young, Techniques of Management Accounting, McGraw Hill.
McNair, C. J. and L. P. Carr, Responsibility Redefined: Changing Concepts of

Accounting-based Control.

Online links www.allbusiness.com
www.internalaccounting.com

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