12.13 Combe Cullen Systems manufactures two products in its Oldfield division.

Traditionally the company has used an overhead absorption system based on machine hours. However, following a management consultancy exercise in which outside consultants reviewed the management information systems, the directors have decided to pilot an ABC system at the Oldfield factory. For the coming year, 2013, Oldfield’s production overheads are estimated as follows:

Factory rent and rates 42 200 Heat and light to factory 23 950 Factory insurance 7 100 Supervisory salaries 38 540 Other indirect labour 18 030 Canteen charges 6 100 Machinery depreciation 18 000 Machinery maintenance 5 520 Production consumables (e.g. machine oil) 2 050 Other factory costs 7 480 Total 168 970 Following a detailed review of the production processes, the finance director and the divisional accountant identify a set of key cost drivers, together with cost allocations to each, and estimates of the relevant quantities involved for products A and B in the 2013 financial year:
Activity Cost driver Total Product A Product B Total cost per cost driver £
Planned units of production 6 000 5 000 Machining Machine hours 11 000 6 000 5 000 63 030 Assembly Labour hours 9 000 3 000 6 000 43 020 Packing Labour hours 4 000 2 000 2 000 31 000 Materials ordering No. of orders 111 86 25 9 990 Materials issues No. of issues 150 103 47 12 000 Machine set up Number of hours used in set up 33 25 8 5 940 Quality inspection Number of inspections 35 10 25 3 990 Total 168 970 Each planned unit of production of both product A and product B uses one machine hour. One unit of A has a prime cost of £12.50, while one unit of B has a prime cost of £16.00.
Required:

a) Calculate the overhead absorption rate based on the company’s traditional system of using machine hours as a basis for overhead absorption.

b) Calculate the overhead per unit of product A and product B using the data provided for the new ABC system.

c) Calculate the production cost of one unit of product A and one unit of product B under both the old and the new costing systems.

d) Comment on the difference between the production costs for each product under the old and the new costing systems.
Work to two decimal places (i.e. the nearest penny).