Comparison of traditional product costing with ABC. Having attended a CIMA course on activity-based costing (ABC) you decide to experiment by applying the principles of ABC to the four products currently made and sold by your company. Details of the four products and relevant information are given below for one period:

The four products are similar and are usually produced in production runs of 20 units and sold in batches of 10 units.The production overhead is currently absorbed by using a machine hour rate, and the total of the production overhead for the period has been analyzed as follows:

You have ascertained that the ‘cost drivers’ to be used are as listed below for the overhead costs shown:

The number of requisitions raised on the stores was 20 for each product and the number of orders executed was 42, each order being for a batch of 10 of a product.
You are required:

(a) to calculate the total costs for each product if all overhead costs are absorbed on a machine hour basis;

(b) to calculate the total costs for each product, using activity-based costing;

(c) to calculate and list the unit product costs from your figures in (a) and (b) above, to show the differences and to comment briefly on any conclusions which may be drawn which could have pricing and profit implications.

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Product A B C D Output in units 120 100 80 120 Costs per unit: () () () () Direct material 40 50 30 60 Direct labour 28 21 14 21 Machine hours (per unit) 4 3 2 3