Plus Doubleplus

Annual production and sales 24,000 units 24,000 units

Direct labour hours per unit 1.0 1.5

Number of orders 10 140

Number of batches 12 240

Number of setups per batch 1 3

Special parts per unit 1 4

Information relating to production overhead costs is as follows

Cost driver annual cost

Setup costs number of setups 73,200

Special parts handling number of special parts 60,000

Other materials handling number of batches 63,000

Order handling number of orders 19,800

Other overheads - 216,000

432,000

Other overhead costs do not have an identifiable cost driver, and in an ABC system. These overheads would be recovered on a direct labour hours basis.

Required

1. Calculate the production cost per unit of Plus and of Doubleplus if the company uses traditional absorption costing and the overheads are recovered on a direct labour hours basis
2. Calculate the production cost per unit of Plus and of Doubleplus if the company uses ABC.
3. Comment on the reasons for the differences in the production cost per unit between the two methods.
4. What are the implications for management of using an ABC system instead of an absorption costing system?