The following information provides details of the costs, volume and cost drivers for a particular period in
Question:
The following information provides details of the costs, volume and cost drivers for a particular period in respect of ABC plc, a hypothetical company:
"The company operates a just-in-time inventory policy, and receives each component once per production run. In the past the company has allocated overheads to products on the basis of direct labour hours.
However, the majority of overheads are more closely related to machine hours than direct labour hours. The company has recently redesigned its cost system by recovering overheads using two volume-related bases: machine hours and a materials handling overhead rate for recovering overheads of the receiving department. Both the current and the previous cost system reported low profit margins for product X, which is the company's highest-selling product. The management accountant has recently attended a conference on activity-based costing, and the overhead costs for the last period have been analysed by the major activities in order to compute activity-based costs. From the above information you are required to: (a) Compute the product costs using a traditional volume-related costing system based on the assumptions that: (i) all overheads are recovered on the basis of direct labour hours (i.e. the company's past product costing system); (ii) the overheads of the receiving department are recovered by a materials handling overhead rate and the remaining overheads are recovered using a machine hour rate (i.e. the company's current costing system). (b) Compute product costs using an activity-based costing system. (c) Briefly explain the differences between the product cost computations in (a) and (b).
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