Hokomo Sdn Bhd has decided to experiment by applying the principles of activity-based costing (ABC) to the
Question:
Hokomo Sdn Bhd has decided to experiment by applying the principles of activity-based costing (ABC) to the four products currently made and sold by the company. Details of the four products and relevant information are given
below for the period:
Product
A
B
C
D
Output in units
120
100
80
120
Costs per unit (RM):
40
50
30
60
Direct material
40
50
30
60
Direct labour
28
21
14
21
Machine hours (per unit)
4
3
2
3
The products are similar and are usually produced in production runs of 20 units.The production overhead is currently absorbed by using a machine hour rate, and the total of the production overhead for the period has been
analysed as follows:
RM
Machine department costs (rent, utilities, depreciation and supervision)
10,430
Set-up costs
5,250
Stores receiving
3,600
Inspection/quality control
2,100
Materials handling and despatch
4,620
Total costs
26,000
It has been ascertained that the cost drivers to be used are as listed below for the overhead costs shown:
Cost
Cost driver
Machine department costs
Machine hours
Set-up costs
Number of production runs
Stores receiving
Requisition raised
Inspection/quality control
Number of production runs
Materials handling and despatch
Orders executed
The number of requisition raised on the stores was 20 for each product and the number of orders executed was 42, each order being for a batch of 10 of a product.
Required:
a.Calculate the total costs for each product if all overhead costs are absorbed on a
machine hour based.(6 marks)
b.Calculate the total costs for each product, using activity-based costing. (19 marks)
c.Discuss how activity-based costing system can provide more accurate product costs than the traditional costing system by comparing the costs of each product
based on (a) and (b).(5 marks)
Expert Answer:
To apply ActivityBased Costing ABC to the four products of Hokomo Sdn Bhd we need to allocate the overhead costs based on the cost drivers The steps a... View the full answer
