Q1.

Isa manufactures two products: P and D. The following information relates to annual production:

Direct costs (per unit) Production (units)

Direct labour hours (per unit) Number of orders

Number of batches

Number of set-ups (per batch) Special parts (per unit)

PD

$12 $24 24,000 24,000 1.0 1.5

10 140 12 240

1 3 1 4

Information relating to production overheads for the period were as follows:

Cost Driver Annual Cost $

Set-up costs

Special parts handling Other materials handling Order handling

Other overheads

Number of set-ups Number of special parts Number of batches Number of orders

-

73,200 60,000 63,000 19,800 216,000 432,000

NOTE - 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:

(a) Calculate the production cost per unit of P and of D if Isa uses traditional absorption costing and the overheads are absorbed on a direct labour hours basis.

(b) Calculate the production cost per unit of P and of D if the company uses Activity based costing (ABC).

(c) Comment on the reasons for the differences in the production cost per unit between the two methods.

(d) What are the implications for management of using an ABC system instead of an absorption costing system?

(5 marks)

Q2.

Karim & Sons is a small manufacturing company that has been in existence for five years. The CEO (owner) of the business has recently attended a course on ABC (activity-based costing) and ABM (activity based management), and is now considering the implementation of ABC & ABM in the company.

The following additional information relates to Karim & Sons: Industry data:

Karim & Sons Industry $m $m

Revenue 1.5 150 Percentage of revenue relative to the industry 1%

Product cost data for the period just ended is as follows:

DuraPlast

Production (units) 20,000 Material cost (per unit) $50 Labour cost (per unit) $40 Overhead cost (per unit) $10

Required:

Evaluate the decision to implement ABC & ABM by Karim & Sons, to reduce cost and improve performanc .