Hallett Penumbra Systems produces a range of building products at several factories. The company’s directors have decided to pilot an activity-based costing system at one of its factories. The catherin-The factory produces products C and D. After a substantial amount of preliminary work, the finance controller at the factory produces the following list of cost drivers, with overhead cost pool allocations to each driver, and an estimate of the relevant quantities involved for the 2009 financial year:

A unit of product C uses one machine hour, whereas a unit of product D uses 1.4 machine hours. One unit of C has a prime cost of €28.50, and a unit of D has a prime cost of €32.70. 

Required:

a) calculate the overhead absorption rate based on the company’s traditional system of using machine hours as a basis for overhead absorption 

b) calculate the overhead per unit of product C and product D using the data provided for the new ABC system 

c) calculate the production cost of one unit of product C and one unit of product D under the old and new costing systems 

d) explain the principal reasons for the difference in the product costs produced by the old and the new costing systems.

Activity Planned units of production Machining Finishing Materials ordering Materials issues Machine set up Total Cost driver Machine hours Labour hours Number of orders Number of issues Number of hours used in set up Total 6 000 12 000 186 120 70 Product C 6 000 2 500 7 200 124 70 26 Product D 5 000 3 500 4 800 62 50 44 Total cost per cost driver 148 200 136 440 12 183 11 592 19 915 328 330