Alpha Ltd produces two products: A and B. The company produces both products with the same equipment. Product B is a high volume product while product A is produced in low volumes. Details of cost of activities, inputs, and output are as follows:

Overhead cost analysis $
Material handling 150 000
Material procurement 50 000
Set-up 150 000
Quality control 250 000
Production 600 000

Product B: 20 000 units

The production manager has recently attended a workshop on cost reduction measures. One of the topics that featured prominently in the workshop was the importance of using Activity Based Costing (ABC) over the traditional absorption costing system.

The production manager has requested you to assist with the following:

1. To determine the overhead cost per product using a traditional absorption costing system.
2. To determine the overhead cost per product using ABC system.
3. How does the use of ABC system affect your answers.
 

Cost driver analysis Overhead Material handling Material procurement Set-ups Quality control Production Annual output Cost driver Material movements Number of orders Number of set-ups Number of inspections Direct labour hours Product A: 80 000 units Product A 100 200 60 150 40 000 Product B 50 100 40 100 10 000