12.8 Hallett Penumbra Systems produces a range of building products at several factories.

The company’s directors have decided to pilot an ABC system at one of its factories.

The factory produces products C and D. After a substantial amount of preliminary work, the finance controller at the factory produces the following list of cost drivers, with overhead cost pool allocations to each driver, and an estimate of the relevant quantities involved for the 2012 financial year:

Activity Cost driver Total Product C

Product D

Total cost per cost driver £

Planned units of production 6 000 5 000 Machining Machine hours 6 000 2 500 3 500 148 200 Finishing Labour hours 12 000 7 200 4 800 136 440 Materials ordering No. of orders 186 124 62 12 183 Materials issues No. of issues 120 70 50 11 592 Machine set up Number of hours used in set up 70 26 44 19 915 Total 328 330 unit of product C uses one machine hour, whereas a unit of product D uses 1.4 machine hours. One unit of C has a prime cost of £28.50, and a unit of D has a prime cost of £32.70.
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 C and product D using the data provided for the new ABC system.

c) Calculate the production cost of one unit of product C and one unit of product D under the old and new costing systems.

d) Explain the principal reasons for the difference in the product costs produced by the old and the new costing systems.