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)