company manufactures three products, A, B and C. Each product uses the same materials and the same type of direct labour but in different quantities. For many years, the company has been using full absorption costing and absorbing overheads using direct labour hours. Selling prices are then determined using cost plus pricing. This is common within this industry, with most competitors applying a standard mark- up.

Budgeted production and sales volumes for A, B and C for the next year are 2,000 units, 3,200 units and 2,200 units respectively. The budgeted direct costs of the three products are as follows:

ABC

per unit Direct materials 12 Direct labour (10 per 30 mins) 30

per unit 15

40

per unit 20

50

In the next year, the company also expects to incur indirect production costs, which are analysed as follows:

Machine set up costs 125,000 Machine running costs 150,500

Material ordering costs 30,000 General facility costs 67,000

History has shown the machine set up costs are driven by the number of batches, material ordering costs by the number of purchase orders and machine running costs and general facility costs by the number of machine hours. The following additional data relate to each product:

Batch size (units)

Number of batches

No of purchase orders per batch Machine hours per unit

ABC

500 400 110 4 8 20 2 4 4

0.5 1 2

The company wants to boost sales revenue in order to increase profits but its capacity to do this is limited because of its use of cost plus pricing and the application of the standard mark-up. The finance director has suggested using ABC instead of full absorption costing since this will alter the cost of the products and may therefore enable a different price to be charged.

You are required to:

a) Calculate the budgeted full production cost per unit of each product using the current method of absorption costing.

b) Calculate the budgeted full production cost per unit of each product using Activity Based Costing.

c) Explain FOUR differences between traditional costing and activity based costing.

5001LBSAF