Cats Ltd$,$ manufactures two products namely $$Snack$$ and $$Hide$,$ using an automated

manufacturing process. The company manufactures $75000$ units of Snack and $525000$ units

of Hide per year.

Economic order quantity calculations determined that the most economical option would be

$1000$ and $3000$ units per production run $($batch$)$ for Snack and Hide respectively. Set$-$ups are

done for every batch and each set$-$up takes $24$ minutes for Snack and $15$ minutes for Hide.

Total direct manufacturing costs for the coming financial year are as follows:

R

Direct Material

$-$ Snack $1988000$

$-$ Hide $5112000$

The budgeted manufacturing overheads for the coming financial year are as follows:

R

Material purchase and storage $520000$

Setting up of machines $3705000$

Processing $2125000$

Maintenance $150000$

Total $6500000$

The products are manufactured by machines only. It takes three machine hours to manufacture

a batch of $1000$ Snack units and two machine hours for every batch of $3000$ Hide units. An

analysis of the manufacturing process revealed the following:

BCOMACCT Management Accounting and Finance $2$

REGENT Business School Page $52$

Activity Cost driver

Material purchase and storage Number of orders placed: $50$ orders

Snack and $75$ orders for Hide per

Year

Setting up of machines Setting up hours

Processing Machine hours

Maintenance $($routine inspection of machines$)$ Inspection hours $($Inspection is done

After every $25$ hours of machine time

and takes $36$ minutes for Snack and

$12$ minutes of Hide

Cats Ltd$.$ currently allocates all manufacturing overheads according to machine hours.

REQUIRED

a$.$ Allocate the total overheads using the traditional costing method.

b$.$ Set up an ABC system and allocate total overheads.

c$.$ Calculate the product cost per unit for Snack and Hide by applying both methods and

then compare the results