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Majic Ltd follows the traditional method of overhead absorption with direct labour hours as the basis of allocation. The budgeted overheads of Majic Ltd
Majic Ltd follows the traditional method of overhead absorption with direct labour hours as the basis of allocation. The budgeted overheads of Majic Ltd for the year has been estimated to be 158,000, and the budgeted direct labour to be 4,000 hours. The company is currently processing a job order which consists of three products, product X, Y and Z. The new management accountant of Majic Ltd has suggested that an Activity Based Costing system is implemented to allocate overheads for the three products. Accordingly, the overheads related to product X, Y and Z have been identified and split in to five cost pools. The activity drivers and driver volumes for have also been identified as below. Activity driver Budgeted overhead E Material handling cost 18,000 Number of material receipts Set up cost Power and electricity Finishing (assisted by computers) Quality costs Total overheads 10,000 Direct labour hours Budgeted quantity/volume of activity driver 1,200 2,500 22,000 Machine hours 5,500 37,500 Computer hours 7,500 10,500 Number of inspections 98,000 60 The following details have been provided regarding the activity consumption of product X, Y and Z Product X Product Y Product Z Number of material 550 450 200 receipts Direct labour hours. 600 400 1,500 Machine hours. 2,250 2,000 1,250 Computer hours 2,500 3,000 2,000 Number of inspections 25 20 15 Number of units 100 80 150 produced
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