Example Topic $5-$ ABC

A clothing manufacturer, Brief Encounter Ltd$.,$ manufactures $2$ products $-$ Rose & Rouge, using the

same equipment and similar processes.

Activities have been examined to identify the relevant cost drivers as: machine hours, set$-$ups and

customer orders.

August budgeted data has been provided relating to the cost drivers, in addition to material, labour

and overhead costs and quantities produced.

August budget ABC data

Budgeted number of units manufactured

Direct material cost per unit

Direct labour hours per unit

Direct labour cost per hour

Machine hours per unit

Set$-$ups during the month

Customer orders handled in the month

Rose

$20,000$

$5$

$0\mathrm{.}5$

$8$

$2$

$30$

$40$

Rouge

$10,000$

$20$

$0\mathrm{.}5$

$8$

$4$

$70$

$160$

Overhead costs for the month:

relating to machine activity

relating to set$-$ups of production runs

relating to order handling

$300,000$

$50,000$

$70,000$

For the traditional absoprtion costing approach, assume overhead costs are absorbed on the basis of

direct labour hours.

Required:

Using the above data, prepare the full production cost of each unit of the Rose & Rouge products

using both the traditional absorption costing approach and using the ABC costing approach.