Periodic Limited

Periodic Limited makes three main products, using broadly the same production method and equipment for each. They use a conventional product costing system, though they are considering using an 'activity based costing system'. Details of the three products for a typical period are:

----Hours per unit ----- Materials Volumes

Labour Machine per unit (units)

Product A 0.5 1.5 20 750

Product B 1.5 1 12 1250

Product C 1 3 25 7000

Direct labour costs 8 per hour and production overheads are absorbed on a machine hour basis. The rate for the period is 30 per machine hour.

Required:

(a) Calculate the cost per unit for each product using conventional methods.

(6 marks)

(b) Calculate the projected total production overhead for a typical period.

(2 marks)

(c) Further analysis shows that the total of production overhead can be divided as follows:

Costs relating to set-ups 35

Costs relating to machinery 20

Costs relating to materials handling 15

Costs relating to inspections 30

Total production overhead 100

The following activity volumes are associated with the product line for the period as a whole:

Number of set ups Number of movements Number of

Of materials inspections

Product X 75 12 150

Product Y 115 21 180

Product Z 480 87 670

Totals 670 120 1000

Required:

(i) Calculate the cost per unit for each product using ABC (activity-based costing) principles.

(14 marks)

(ii) Comment on the difference in your results. Also highlight the limitations of this type of analysis.

(3 marks)