Business question

Question Description

Answer one question

Shamrock Printing produces a variety of diaries and notebooks that are sold only on the company’s website.The design of the diaries and notebooks is customised depending on the customers’ requirements.Historically, the company used a traditional overhead system based on machine hours to allocate overheads to products.The company recorded a loss for the first time, since it commenced trading ten years ago.The managing director, James Forrest is very concerned and has suggested that the company should increase the price of the notebooks and diaries by at least 25%.However, the management accountant has suggested that the problem could relate to overhead allocation, and argued the case for the adoption of an activity based costing system.

An initial activity analysis has been carried out.This shows that a customer first places the individual order and then discusses the design of the notebooks and diaries using emails.The artwork depends on the number of setups required to compile for each product.In addition, it is company policy to dispatch each order individually.Ordering costs and despatch costs are the same for each product ordered.

Financial information relating to the most recent trading period, and to the two last orders received has been provided below:

Overhead Costs
Ordering costs	£7,200
Design expenses	£28,500
Artwork	£17,250
Despatch costs	£10,800

Activity drivers
Total orders received	48,000
Total design consultation emails	356,250
Total artwork setups	120,000
Total packets dispatched	90,000
Total machine hours	21,250

Details of orders received	Order for 1 Notebook	Order for 1 diary
Order reference	CFCNote	CFCDiary
Direct materials (paper, binding etc.)	£1.86	£1.24
Direct labour	£0.52	£0.68
Machine hours required	0.20	0.30
Number of design consultations	3	5
Number of artwork setups	4	8

(a)Calculate the cost of each order received using:

The existing overhead allocation method
Activity based costing (ABC)

(22)

(b)Comment briefly on your answer in part (a) (i) and (ii) above

(5)

(c)With reference to the academic literature discuss why organisations may be reluctant to adopt activity based costing.

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