Calculation of traditional and ABC product costs The Gadget Co produces three products, A, B and C, all made from the same material. Until now, it has used traditional absorption costing to allocate overheads to its products. The company is now considering an activity-based costing system in the hope that it will improve profitability. Information for the three products for the last year is as follows:

The price for raw materials remained constant throughout the year at $1.20 per kg. Similarly, the direct labour cost for the whole workforce was $14.80 per hour. The annual overhead costs were as follows:

Required:

(a) Calculate the full cost per unit for products A, B and C under traditional absorption costing, using direct labour hours as the basis for apportionment.
(5 marks)

(b) Calculate the full cost per unit of each product using activity-based costing.
(9 marks)

(c) Using your calculation from

(a) and

(b) above, explain how activity-based costing may help The Gadget Co improve the profitability of each product.
(6 marks)
ACCA F5 Performance Management

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A B C Production and sales volumes (units) 15000 12000 18000 Selling price per unit $7.50 $12 $13 Raw material usage (kg) per unit 2 3 4 Direct labour hours per unit 0.1 0.15 0.2 Machine hours per unit 0.5 0.7 0.9 Number of production runs per annum 16 12 8 Number of purchase orders,per annum Number of deliveries to retailers per antium 24 28 42 48. 30 62 22