An airline catering company produces three standard meal packs about which the following information is available for next year:

For next year the production staff budget is £187,200 with a pay rate of £4.80 per hour.
Apart from production staff and material costs, overheads are estimated at £1,010,000 and are made up as follows:

Notes:
1. The quality control costs are related to testing a random sample of orders dispatched.
2. The central management costs are not attributed to any activities and are to be absorbed on the basis of production staff hours.

In the coming year, the activity volumes are expected to be as follows:

In the current year and in previous years the company has absorbed overheads with productive staff hours as the absorption base. Prices have been based upon full cost plus 20%.
In recent years prices have been steady using this approach. The costs and prices for the current year are as follows:

(a) Determine the full cost of each pack for next year using:
(i) an absorption approach with direct production staff hours as the absorption base.
(ii) an activity-based approach using the information given above.

(b) Comment on the results of your calculations and indicate the advantages and disadvantages of moving to an activity-based approach.

Transcribed Image Text:

Pack Expected output (numbers of packs) Production staff time per pack (minutes) X 90,000 Y 70,000 N 40,000 125 10 Total material costs 247,500 250,000 180,000