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>Total direct labour hours per unit 1.5 2.0
The estimated total overhead for 2007 is $1,800,000. Cornerstone is considering the use
of activity-based costing (ABC) to refine its costing system. It obtains the information
below :
Cost Driver Capstone
(Expected total driver units
for 2004)
Anchorock
(Expected total driver units
for 2004 )
Floor space (Sq m) 30,000 20,000
Machine hours (MH) 100,000 150,000
No. of Setups 42,000 18,000
Overhead costs for 2007 includes : $
Factory rental 70,000 Floor space related
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nd maintenance 1,250,000 Machine hours related
Machine setup 480,000 Setup related
1,800,000
Required :
(a) Calculate the total cost of each product (assuming that the expected no. of units are
produced) using the activity-based costing system. (6 marks)
(b) Why is it important for employees to participate in identifying activities in ABC?
Discuss 3 “red flags” that indicates that companies have problems with their costing
system. (Word limit : 300). (5 marks)
QUESTION 3 (5 marks)
Jonah Ltd. manufactures 2 joint products. Both products require additional processing
beyond the split-off point. There were no opening inventories at 1 Jan 2007. The
following information relates to the month of Jan :
Small-Fry Big-Whale
Production (units) 70,000 81,000
Sales (units) 58,500 67,800
Closing inventories (units) 11,500 13,200
Selling price per unit $18 $19
Additional processing costs $189,000 $230,000
Total joint processing costs for Jan were $580,000. Joint costs are allocated using the net
realisable value method. The closing inventories are finished goods that are ready for
sale.
Required :
(a) Determine the cost of the ending inventories of each of the products as at 31 Jan
2007. (3 marks)
(b) Small-Fry could be processed further into Medium-Dolphin for an additional cost of
$5.00 per unit. Medium-Dolphin would sell for $25.00 per unit. Should the company
produce Medium-Dolphin? (2 marks)

(b) Explain why overcosting and undercosting product occur with traditional costing systems. Why might individuals resist ABM and how could an organization overcome the resistance? (Word limit: 300)
Traditional costing systems which allocates overhead to the cost object arbitrarily and based on volume based measure such as direct labour hours or machine hours. Traditional costing systems, which assume that products cost all resources in proportion to their production volumes, thus report distorted product costs and caused overcosting and undercosting product. For instance, one product might take more time in one expensive machine than another product, but since the amount of direct labor and materials should be the same, the additional cost for the use of the machine would not be recognized and identified when the same broad ‘on-cost’ percentage is recorded. Consequently, when multiple products share common costs, there are a danger and a leak of one product subsidizing another. By through these, that is why overcosting and undercosting product occur with traditional costing system...........................