BETA Ltd has two production departments (P1 and P2) in its factory. Overheads in each department are currently absorbed into product costs on the basis of machine hours worked.

The production overhead absorption rate in Department P1 is K560 per machine hour. In Department P2 the absorption rate is to be established from the following data relating to the department for a period:K Allocated production overheads 24,260 Apportionment of factory level production overheads 37,539 Apportionment of service department production overheads 32,91194,710Machine hours worked 11,550

The company is considering the introduction of a revised overhead apportionment system using activity-based costing.

The overheads incurred in the factory in the period have been re-classified into activities, and cost drivers for each activity have been identified and measured, as follows:

Activity

Overhead

Cost driver

Cost driver volume (Depts P1 and P2)KMachine set up22,224batches100 Machine operation69,255machine hours25,650 Inspection and testing42,816units produced446,000 Servicing39,375labour hours18,750 Total173,670

The following actual information is available for the period relating to Product X, one of the products manufactured in the factory:

(1) 8 batches (2) 2,540 machine hours (Department P1: 1,400 hours; Department P2: 1,140 hours) (3) 58,068 units produced (4) 2,303 labour hours

Required:

(a) Using the existing absorption method:

(i) Calculate the production overhead absorption rate in Department P2;[2 Marks]

(ii) Calculate the production overhead cost per unit of Product X.[3 Marks]

(b) Using an activity-based approach:

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(i) Calculate a production overhead absorption rate for each activity;[4 Marks]

(ii) Calculate the production overhead cost per unit of Product X.[5 Marks]

(c) Describe possible outcomes of a change to an activity-based approach to overhead absorption from a traditional absorption costing method.