Peter Ltd produces two products, Small and Large. The company currently absorbs overheads on the basis of units produced, but they have read about a method based on activities undertaken and have asked you to help them investigate the method.

The output is Small  15,000 and Large 12,000.

The company has provided the following information;

Overhead activity    Annual costs           Cost driver              Amount of activity

                                                                                          Small              Large

Production              £129,800      Machine hours                  1260             1100

Quality inspection      £58,080      No. of production runs        80                30

Material purchased    £71,820      Purchase orders                30                12

Deliveries to retailers £18,080      Shipments                        20                12

Required:

• Produce a statement that shows the overhead split using the original method, and showing the amount per unit produced.

[5 marks]

1. Produce a statement showing the overhead split using Activity Based Costing. Show the amount per unit produced.

[10 marks]

2. Explain the difference between the two methods and the difference in cost per unit.

[5 marks]

3. Discuss the advantages and disadvantages of the two methods of overhead allocation.

                                                                                                              [5 marks]

                                                                                                    Total: 25 marks