Question
Northern Ltd makes two products A and B. Information relating to each of these products is set out below. A B Selling price per unit
Northern Ltd makes two products A and B. Information relating to each of these products is set out below. A B Selling price per unit 100 120 Material cost per unit 45 60 Labour time per unit 2 hours 2 hours Labour rate per hour 14 14 Number of Units Produced each year 6,000 units 8,000 units Number of sales invoices issued each year 100 500 Size of each production batch 300 200 Bought-in parts per unit 1 4 Machine set-ups per batch 3 6 Machine Hours total 7,400 29,600 The Finance Director of Northern Ltd has recently produced the following analysis of overheads and their relevant cost drivers: Cost Pool Cost Driver Cost () Bought-in parts handling costs Number of bought-in parts 150,000 Materials handling costs Number of production batches 66,000 Sales invoicing costs Number of sales invoices issued 18,000 Machine set-up costs Number of machine set- ups 28,000 All other overheads Machine hours 74,000 Total overhead costs 336,000 Required: A) Calculate the total cost per unit and profit per unit for each product using: - the traditional full cost method of overhead absorption (based on labour hours) (2 marks) - the activity-based costing (ABC) method . B) Comment on your findings and suggest an action plan accordingly .
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