Hoffman Ltd makes only two types of portable cooking stove, the Lightweight (LW) and the Megarange (MR). Last year it produced 4,500 LWs and 500 MRs. The direct materials cost 3.00 for one LW and 10.00 for one MR. The assembly workers who put the stoves together are all paid at the same rate of 6.30 an hour. When LWs are being produced each operative assembles nine stoves an hour and when MRs are being produced each operative assembles seven stoves an hour. This is the only labour that Hoffman classes as 'direct labour'. The factory uses automated machinery to manufacture the components which are common to both stoves. The other components are bought in. Each stove uses 15 machine hours in its construction. For some time now, the company has been considering the introduction of activity- based costing. It has decided to recost last year's production using this method so it can compare costs with those under its current absorption costing system. The current overhead absorption rate is based on the number of machine hours. Last year's production activities have been analysed as follows: Activity Purchasing Training Setting up machines Running machines Cost driver Purchase order Training hour No. of set-ups Machine hours Activity cost pool () 20,000 1.000 2,250 14,250 Total 37,500 The analysis also quantified the number of cost drivers caused by each stove: No. of cost drivers caused by MRS 40 Activity Purchasing Training Setting up machines Running machines No. of cost driver caused by LWS 360 20 60 67,500 30 30 7,500 Questions 1. Calculate the absorption cost for each type of stove. (1 points) 2. Calculate the activity-based cost for each type of stove. (1 points) 3. Comment on your findings. (2 points) Hoffman Ltd makes only two types of portable cooking stove, the Lightweight (LW) and the Megarange (MR). Last year it produced 4,500 LWs and 500 MRs. The direct materials cost 3.00 for one LW and 10.00 for one MR. The assembly workers who put the stoves together are all paid at the same rate of 6.30 an hour. When LWs are being produced each operative assembles nine stoves an hour and when MRs are being produced each operative assembles seven stoves an hour. This is the only labour that Hoffman classes as 'direct labour'. The factory uses automated machinery to manufacture the components which are common to both stoves. The other components are bought in. Each stove uses 15 machine hours in its construction. For some time now, the company has been considering the introduction of activity- based costing. It has decided to recost last year's production using this method so it can compare costs with those under its current absorption costing system. The current overhead absorption rate is based on the number of machine hours. Last year's production activities have been analysed as follows: Activity Purchasing Training Setting up machines Running machines Cost driver Purchase order Training hour No. of set-ups Machine hours Activity cost pool () 20,000 1.000 2,250 14,250 Total 37,500 The analysis also quantified the number of cost drivers caused by each stove: No. of cost drivers caused by MRS 40 Activity Purchasing Training Setting up machines Running machines No. of cost driver caused by LWS 360 20 60 67,500 30 30 7,500 Questions 1. Calculate the absorption cost for each type of stove. (1 points) 2. Calculate the activity-based cost for each type of stove. (1 points) 3. Comment on your findings. (2 points)
