DAY Ltd manufactures four products - A, B, C and D using the same technology in machine and processes. The following data relates to a production month:

ABCD

Volume (units)3004,0004005,000

Material cost/unit$4$4$15$15

Labour cost/unit$2$2$12$10

Direct labour hour/unit0.50.521.5

Machine hour/unit0.250.251.01.5

The total production overhead costs for the month were analyzed as follows:

Machine related factory overhead costs - $12,600

Set-up costs are - $9,450

Cost of placing material orders - $1,200

Material handling costs - $6,000

Administration for spare parts - $3,060

These overhead costs are absorbed by products on a machine hour rate of $3.60 per hour, giving an overhead cost per product of;

A = $0.90B = $0.90C = $3.60D = $5.40

However, investigation into the activities related to the production overhead for the month showed the following figures.

ABCD

No. of set-ups2436

No. of material orders2323

No. of material handling28410

No. of spare parts1413

Required:

a)Compute an overhead cost per product using the ABC techniques, tracing overheads to production units by means of cost drivers.

b)Comment briefly on the differences disclosed between overheads traced by the present system and those traced by ABC.