Comparison of traditional product costing with ABC Duo plc produces two products A and B. Each has two components specified as sequentially numbered parts i.e. product A (parts 1 and 2) and product B (parts 3 and 4). Two production depart- ments (machinery and fitting) are supported by five service activities (material procurement, material handling, maintenance, quality control and set up). Product A is a uniform product manufactured each year in 12 monthly high volume production runs. Product B is manufactured in low volume cus- tomised batches involving 25 separate production runs each month. Additional information is as follows:

"It may be assumed that these represent fairly homo- geneous activity-based cost pools.

It is assumed these costs (depreciation, power etc.) are primarily production volume driven and that direct labour hours are an appropriate surrogate measure of this.

You are required to compute the unit costs for products A and B using (i) a traditional volume- based product costing system and (ii) an activity- based costing system. (Adapted from Innes, J. and Mitchell, F., Activ- ity Based Costing: A Review with Case Studies, Chartered Institute of Management Accountants, 1990)

Transcribed Image Text:

Production details: Product A Product B Components Parts 1, 2 Annual volume produced 300 000 units Parts 3, 4 300 000 units Annual direct labour hours: Machinery department 500 000 DLH 600 000 DLH Fitting department 150 000 DLH 200 000 DLH