2. (a) For the following categories of activities assign an appropriate cost driver from the list provided against each activity in TABLE 1. Cost Drivers: Cost of Inspection/Test

Machine use hours

Direct Labour Hours Number of Purchase Orders

Number of Production Runs

Material Delivery/Invoices.

Activities to choose product	cost drivers
activity centre 1 machining	machine use hour
activity centre 2 machining	machine use hour
Product assembly	number of production runs
Materal procurement activities
product materials purchased	number of purchase orders
material reception storage	material delivery/invoices
materials issued/ production run	number of production runs

TABLE 1

(b) TABLE 2 shows the cost drivers, the quantity and unit cost of the cost driver, and total activity cost. For two products A and B it is found that: The direct labour hours for products A and B are the same. It takes approximately four times as many machining hours in both cost centres to produce product B as product A. Product A requires one quarter of the materials purchased for B. Product A requires one third of the total Delivery notes/invoices. Product A has issued one third of the total materials issued per production run. Product A has issued one half of the planning per production run of that required by Product B. Product B requires twice as many machine set-ups as product A. The products have the same number of quality control inspections.

If the company produces 50 000 each of products A and B: (i) Complete TABLE 2 to determine the cost driver unit costings in column 5 for the activities of column 1. Show also the product quantity splits in column 4 of each activity for product A and B (e.g. quantity of cost driver Activity Centre 1 is shown as split 100 000 product A and 400 000 product B). (ii) Determine the overhead activity cost allocations to products A and B (using the activity proportions calculated in column 4) by completing TABLE 3. (iii) Determine the total overhead allocations to products A and B. (iv) Find the per unit product overhead cost allocations for each product.

Activity involved to Produce Product	Allocated Cost of Activity	Activity cost driver	Quantity of cost driver	Cost driver unit cost /rate per cost driver
Activity Centre 1 Machining	750 000	machine use hrs	500 000 (100 000 prod A 400 000 prod B)
Activity Centre 2 Machining	500 000	machine use hrs	250 000
Product assembly	400 000	direct labour hrs	100 000
Material procrument activities
product materials purchase	600 000		5000
product matrials reception/storage	240 000		3000
materials issued/production run	225 000		1500
Support activities
production run planning	150 000	number of production runs	1500
machine setting up tooling	30 000	setting up tooling labour hrs	700
statistical quality control	10 000	sample inspection and test cost	400
TOTAL

TABLE 2.

ACTIVITY	PRODUCT A		PRODUCT B
Activity Centre 1 Machining	1.5*100 000	150 000	1.5*400 000	600 000
Activity Centre 2 Machining
Product assembly
Materials procurement activities
product materials purchase
Product materials reception/storage
Materials issued/ production run
Support activities
production run planning
machine setting up/tooling
statistical quality control
TOTAL

TABLE 3.