Computation of traditional and ABC unit costs and comments on the reported costs BML has three product lines P1, P2 and P3. Since its creation the company has been using a single direct labour cost percentage to assign overhead costs to products.

Despite P3, a relatively new line, attracting additional business, increasing overhead costs and a loss of market share, particularly for P2, a major product have convinced the management that the costing system is in need of some developments.

A team, led by the management accountant, was established to develop an improved system of costing based on activities. The team spent several weeks collecting data (see tables below) for the different activities and products. For the accounting period in question, given in the tables below is data on BML’ three product lines and overhead costs:

Required:

(a) Calculate the overhead rate and the product unit costs under the existing costing system.
(4 marks)

(b) Identify for each overhead activity, an appropriate cost driver from the information supplied and then calculate the product unit costs using a system that assigns overheads on the basis of the use of activities. (9 marks)

(c) Comment on the results of the two costing systems in

(a) and

(b) above.

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P1 P2 P3 Production volume 7 500 units 12 500 units 4 000 units Direct labour cost per unit 4 8 6-4 Material cost per unit 18 25 16 Selling price per unit 47 80 68 Materials movements (in total) 4 25 50 Machine hours per unit 0.5 0.5 0.2 Set-ups (in total) 1 5 10 Proportion of engineering work 30% 20% 50% Orders packed (in total) 1 7 22 Activities Material receiving and handling Overhead cost () 150 000 Machine maintenance and depreciation 390 000 Set-up labour 18 688 Engineering 100 000 Packing 60 000 718 688