Egerton Manufacturing Co produces a range of products at seven separate sites. Each site produces a maximum of four products. The directors have decided to introduce Activity Based Costing (ABC) and have asked each site manager to obtain and analyse the relevant data for their site. Product costs are currently calculated using absorption costing, with overheads being absorbed on a machine hour basis. Machine hours are limited to 1,140 hours per period. As part of the process of introducing ABC, the directors wish to assess the profitability of individual products, with the possibility that the product range may be reduced. You are the Manager of the Brumley site and you have obtained the following data:

Product A B C

RMRMRM

Selling price per unit 300 530 35

Direct material per unit 55 67 98

Direct labour per unit 41 54 57

Overheads per unit 117.20 293 117.20

Total cost per unit 213.20 414 272.20

Budgeted production volume 600 units 400 units 200 units

Machine hours per unit 0.6 1.5 0.6

Production runs in period 32 40 25

Number of sales orders 19 5 15

Number of deliveries of material 8 2 16

The budgeted overheads of the site for the period are:

Machine running costs RM78,560

Set up costs RM82,900

Material handling costs RM49,500

REQUIRED:

A.Calculate the cost of each product using traditional absorption costing.

(5 Marks)

B.Calculate the cost of each product using ABC.

(16 Marks)

C.Draft a memo to the Managing Director which:

i.Using the ABC information indicate which product(s) should no longer be manufactured and justifies your recommendation.

(4 Marks)

(25 Marks)