Question
Case 2 Activity-based Costing (ABC) vs. Time-based Costing Hello company manufactures three products, A, B and C.Forecast data concerning overheads (indirect costs) of the products
Case 2 Activity-based Costing (ABC) vs. Time-based Costing
Hello company manufactures three products, A, B and C.Forecast data concerning overheads (indirect costs) of the products for the next period as follows.
A | B | C | |
Forecast output (units) | 50 | 60 | 80 |
Machine hours per unit | 2 | 3 | 4 |
Number of customer orders | 10 | 10 | 15 |
Number of quality control inspections | 20 | 30 | 20 |
Number of engineering consultancies | 10 | 8 | 7 |
Areas of workshops (m2) | 2,500 | 5,000 | 2,500 |
Cost pools and related cost drivers
Cost pool $ Cost driver
Machine operating 30,000 Machine hours
Order processing 7,000 No. of customer orders
Quality control 4,000 No. of quality control inspections
Engineering consultancy 2,500 No. of engineer consultancies
Rent of the campus 10,000 Areas of workshops
Required
Calculate the overhead cost to be absorbed by each of the products using the following absorption costing methods.
(1) A traditional absorption method based on a machine hour rate.
(2)An activity-based method, using the relevant cost drivers to trace overhead costs to the individual products.
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