Accounting for Managers Question

A business manufactures television for domestic use. There are three models; X, Y, and Z. The models, their quality and their prices are targeted at varying markets. Product costs are computed using a blanket overhead rate. Products absorb overheads on the basis of labour hour. Generally, prices are set according to cost plus 20%. The following information is given:

	Model X	Model Y	Model Z
Material cost (RM/unit)	25	62.5	105
Direct labour hours (per unit)	0.5	1	1
Budget production/sales (units)	20,000	1,000	10,000

The budgeted overheads for the business for the year are RM4,410,000. Meanwhile, direct labour is RM8 an hour. The business is currently facing rising competition, especially from imported goods. Consequently, the selling price of X is reduced to a level that produces very low profit margin.

To address this problem, an activity-based costing (ABC) approach is proposed. The overheads have been analysed and it is found that these are grouped around main business activities of machining (RM2,780,000), logistics (RM590,000), and establishment costs (RM1,040,000). It is maintained that these costs could be allocated based respectively on cost drivers of machine hours, material orders and space, to reflect the use of resources in each of these areas. After analyzing, the following proportionate statistics are produced as shown below:

	X (%)	Y (%)	Z (%)
Machine hours	40	15	45
Material orders	47	6	47
Space	42	18	40

Required:

Calculate the full cost and selling price determined for each product from:

1. The traditional costing method
2. The activity-based costing method