Q1.

Duff Co manufactures three products, X, Y and Z. Demand for products X and Y is relatively elastic

whilst demand for product Z is relatively inelastic. Each product uses the same materials and the

same type of direct labour but in different quantities. For many years, the company has been using

full absorption costing and absorbing overheads on the basis of direct labour hours. Selling prices are

then determined using cost plus pricing. This is common within this industry, with most competitors

applying a standard mark-up. Budgeted production and sales volumes for X, Y and Z for the next year

are 20,000 units, 16,000 units and 22,000 units respectively. The budgeted direct costs of the three

products are shown below:

PRODUCT X Y X

$per unit $per unit $per unit

Direct materials 25 28 22

Direct labour $ 12 per hour 30 36 24

In the next year Duff Co also expect to incur indirect production cost of $1,377,400 which are analyzed as follow

COST POOLS $ COST DERIVE

Machine set up cost 280,000 Number of batches

Material ordering costs 316,000 Number of purchase orders

Machine running cost 420,000 Number of machine hours

General facility cost 361,000 Number of machines hours

Total 1,377,400

The following additional data related to each product.

PRODUCT X Y Z

Bach size unit 500 800 400

No of purchase order per batch 4 5 4

Machine hours per unit 1.5 1.25 1.4

Duff Co wants to boost sales revenue in order to increase profits but its capacity to do this is limited

because of its use of cost plus pricing and the application of the standard mark-up. The finance

director has suggested using activity based costing (ABC) instead of full absorption costing, since this

will alter the cost of the products and may therefore enable a different price to be charged.

Required:

(a) Calculate the budgeted full production cost per unit of each product using Duff Co's current

method of absorption costing. (Include all workings) (6 points)

(b) Calculate the budgeted full production cost per unit of each product using activity

based costing. (Include all workings) (6 points)

(c) Explain the impact on the selling prices and the sales volumes of each product which

a change to activity based costing would be expected to bring about. (6 points).

Q2

Refer to below table, please fill up the following values (3 points)

(i) Overhead per cost driver unit

(ii) Total Overhead per product per activity

(iii) Cost per item Activity Total

Activity Total Overhead Total Cost deriver unit Overhead per cost deriver unit Cost deriver unit per products Total O/H per product

X Y Z X Y Z

Machinery 20000 230 x 140 80 100 x x x

set up

Materials 12000 90 x 12 14 14 x x x

handling

Quality 24000 120 x 75 55 70 x x x

control

Supervisor 6000 40 x 10 15 25 x x x

Maintenance 6450 25 x 4 6 5 x x x

No of unit produce - - - - - - 1100 450 450

cost per item - - - - - - x x x

What is a cost driver unit, what do you understand by the term "cost driver unit". Give an

example for each activity listed in the above table. (3 points)