Cost

Accounting
Level 3
Model Answers
Series 2 2008 (Code 3017)
QUESTION 1
Easy Travel Ltd is a transport company operating six passenger vehicles. The business,
located in
rented premises, operates Type A and Type B vehicles and employs drivers contracted
from an
agency on the basis of individual jobs.
At present, the company uses a traditional absorption costing system based on costs per
vehicle/km.
to establish the costs of operation. Budgeted operational data for the next period, for each
vehicle
type, is as follows:
Type A Type B
Agency driver costs (£) 10,400 20,000
Number of travelling passengers 5,600 3,600
Km per vehicle 11,000 12,500
The following additional information is provided for each vehicle type:
Vehicle data Type A Type B
Purchase price per vehicle (£) 60,000 20,000
Number of vehicles 2 4
Number of seats per vehicle 46 14
Budgeted operational overheads for the period, not including agency driver costs, are
£36,000
absorbed on a rate per kilometre.
Further investigation has revealed the following activities and related operational
overheads costs:
Activities Costs (£)
Servicing 1,728
Fuel 14,400
Vehicle cleaning 1,628
Vehicle insurance 2,600
Road fund licence 900
Depreciation 5,000
Administration 6,900
Rent 2,844
total 36,000
Other information
(i) Vehicle servicing is carried out regularly based on a predetermined number of
kilometres
completed
(ii) Fuel costs are influenced by the number of kilometres completed
(iii) Cleaning costs are influenced by the number of seats on the vehicles
(iv) Vehicle insurance and depreciation are influenced by the purchase price of the
vehicles
(v) Road fund licence costs are influenced by the number of vehicles in operation
(vi) Administration costs are influenced by the number of travelling passengers
(vii) Rent is influenced by the number of parking bays required. Each vehicle A requires
two bays for
parking whereas each vehicle B only requires one.
REQUIRED
Calculate the total budgeted average operational cost per vehicle for the period, for each
type of
vehicle, using:
(a) Traditional absorption costing
(6 marks)
(b) Activity based costing
(14 marks)
(Total 20 marks)
MODEL ANSWER TO QUESTION 1
(a)Overhead absorption rate
Vehicle type A (2 x 11,000) 22,000km
Vehicle type B (4 x 12,500) 50,000km
Total 72,000km
Operational overheads for period £36,000
Overhead absorption rate (36,000/72,000) £0.50 per km
(i)Traditional absorption costing for each vehicle type
Vehicle type A B
£ £
Agency driver cost 5,200 5,000
Overheads 5,500 6,250
Total cost for the period per vehicle 10,700 11,250
Workings:
Overheads
Type A 0.5 x 11,000 = £5,500
Type B 0.5 x 12,500 = £6,250
(ii)Activity based costing for each vehicle type
Vehicle A Vehicle B
£ £ £ £
Agency driver cost 5,200 5,000
Servicing 264 300
Fuel 2,200 2,500
Cleaning 506 154
Insurance 780 260
Road fund licence 150 150
Depreciation 1,500 500
Administration 2,100 675
Rent 711 356
Overheads 8,211 4,895
Total cost 13,411 9,895