CALCULATION OF ABC PRODUCT COSTS AND A DISCUSSION OF THE USEFULNESS OF ABC.

trimake limited makes three main products using broadly the same production methods and equipment for each. A conventional product costing system is used at present, although an activity based costing system is being considered. details of the three products for a typical period are:

Labour. machine materials. volume hours. unit. per unit. units X. 1 20. 750 Y 1 1. 12. 1250 Z. 1. 3. 25. 7000

Direct labour costs R42 per hour and production overheads are absorbed on a machine hour basis. the rate for the period is R84 per machine hour.

required: a. calculate the cost per unit for each product using conventional methods.

futher analysis shows that the total of production overheads can be divided a follows:

cost relating to set ups. 35% costs relating to machinery. 20% costs relating to materials handling. 15% cost relating to inspection. 30% total production overhead. 100%

the following activity volumes are associated with the product line for the period as a whole. total activities for the period:

no of no of no of set up. movement inspections X. 75. 12. 150 Y. 115. 21. 180 X. 480. 87. 670 Total 670. 120. 1000

a. calculate the cost per unit for each product using ABC principles. b. comment on the reasons for any differences in the costs in your answers to (a) and (b).