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.