Question
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,
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)
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