Moleskin Ltd manufactures a range of products used in the building industry.

Manufacturing is undertaken using one of two processes: the Alpha Process and the Omega process. All of the products are manufactured in batches. The current pricing policy has been to absorb all overheads using direct labour hours to obtain total cost.

Price is then calculated as total cost plus a 35 per cent mark-up.

A recent detailed analysis has examined overhead cost; the results are:

Two of Moleskin’s products are a joist (JT101) and a girder (GR27). JT101s are produced by the Alpha Process in a simple operation. GR27s are manufactured by the Omega Process, a more complex operation with more production stages. Both products are sold by the metre.
Details for the two products are:

Required:

(a) Calculate the price per metre for both JT101s and GR27s detailed above, using traditional absorption costing based on direct labour hours.

(b) Calculate the price per metre for both JT101s and GR27s using activity-based costing. Assume that ‘Other overheads’ are allocated using direct labour hours.

(c) Outline the points that you would raise with the management of Moleskin in the light of your answers to

(a) and (b).

(d) Outline the practical problems that may be encountered in implementing activitybased techniques and comment on how they may be overcome.

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Alpha Process cost Omega Process cost Set-up cost Handling charges Other overheads Analysis of overhead costs Cost per month Monthly volume 96,000 480 hours 44,800 1,280 hours 42,900 260 set-ups 45,600 380 movements 50,700 (see below) 280,000 There are 4,000 direct labour hours available each month.