Hensau Ltd has a single production process for which the followingcosts have been estimated for the period ending 31 December 20X8:

Three products - X, Y and Z are produced by workers who perform anumber of operations on material blanks using hand held electricallypowered drills. The workers have a wage rate of $9 per hour.

The following budgeted information has been obtained for the period ending 31 December 20X8:

Overhead costs for material receipt and inspection, process powerand material handling are presently each absorbed by product units usingrates per direct labour hour.

An activity based costing investigation has revealed that the cost drivers for the overhead costs are as follows:

• Material receipt and inspection: number of batches of material.
• Process power: number of power drill operations.
• Material handling: quantity of material (sq. metres) handled.

Required:

(a) to prepare a summary which shows thebudgeted product cost per unit for each of the products X, Y and Z forthe period ending 31 December 20X8 detailing the unit costs for eachcost element:

(i)using the existing method for the absorption of overhead costs and

(ii) using an approach which recognises the cost drivers revealed in the activity based costing investigation;

(iii)discuss the implications of Hensau making the decision to switch to ABC

(17 marks)

(b) to explain the relevance of cost drivers activity-based costing. Make use of figures from the summary statement prepared in (a) to illustrate your answer.
 
 

$ Material receipt and 15,600 inspection cost Power cost 19,500 Material handling cost 13,650