Question
Pump_it_up Ltd produces two models of water pumps, the household model and the commercial model. Currently, the company uses a conventional costing system i.e., labour
Pump_it_up Ltd produces two models of water pumps, the household model and the commercial model. Currently, the company uses a conventional costing system i.e., labour hours, to estimate its manufacturing overhead. The estimated production volumes are 2,000 units of the household model and 500 units of the commercial model in the forecasting period. Management suspects that the reliance solely on labour hours may not provide reliable costing, and therefore the CFO experiments with an alternative costing system, namely, Activity Based Costing (ABC) system. The following information is provided.
Cost driver consumption | ||||
Activity | OVERHEAD COST | COST DRIVER | Household | Commercial |
Setup | 30,000 | Number of setups | 20 | 40 |
Machining | 150,000 | Machine hours | 4,000 | 6,000 |
Assembly | 60,000 | Labour hours | 2,000 | 1,000 |
Packing | 30,000 | Packing orders | 1,000 | 2,000 |
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