Question 8.3 Hall Products Ltd makes three main products and uses basically similar equipment and production methods for each. At present a traditional absorption costing system is used by the company but the managing director is interested in the use of activity-based costing. She has therefore asked you, as management accountant, to evaluate the two methods of product costing by calculating the unit cost of each of the three products the company makes using both traditional and activity-based costing methods.

The following information is available to you:

Product A Product B Product C Labour hours per unit 0.5 1 1.3 Machine hours per unit 1 1.5 2.5 Materials cost per unit (£) 17 12 20 Annual volume (units) 1000 1500 6000 Production overheads are absorbed on the basis of machine hours at a rate of

£24 per machine hour. Direct labour is paid at a rate of £8 per hour.

Analysis of production overheads has shown that they can be classified as follows:

Machining costs 35%

Set-up costs 30%

Materials handling costs 15%

Inspection costs 20%

Activities in respect of these classifications relate to the total production volume and have been established as follows:
Product A Product B Product C Number of set-ups 100 120 350 Number of materials 15 12 65 movements Number of inspections 100 240 500