QUESTION 1 [30]

Having attended a course on activity-based costing, you decide to experiment by applying the principles of ABC to the four products currently made and sold by your company. Details of the four products and relevant information are given below for one period:

Product A B C D

Output in units 120 100 80 120

Costs per unit R R R R

Direct material 40 50 30 60

Direct labour 28 21 14 21

Machine hours (per unit) 4 3 2 3

The four products are similar and are usually produced in production runs of 20 units and sold in batches of 10 units. The production overhead is currently absorbed by using a machine hour rate, and the total of the production overhead for the period has been analysed as follows:

R

Machine department costs (rent, business rates, depreciation and supervision) 10 430

Set-up costs 5 250

Stores receiving 3 600

Inspection/Quality control 2 100

Materials handling and dispatch 4 620

You have ascertained that the 'cost drivers' to be used are as listed below for the overhead costs shown:

Cost Cost driver

Set-up costs Number of production runs

Stores receiving Requisitions raised

Inspection / Quality control Number of production runs

Materials handling and dispatch Orders executed

The number of requisitions raised on the store was 20 for each product, while the number of orders executed was 42, each order being for a batch of 10 of a product.

Required

1.1 Calculate the total costs for each product if all overhead costs are absorbed on a machine hour basis. (8)

1.2 Calculate the total costs for each product, using activity-based costing. (14)

1.3 Calculate and list the unit product costs from your figures in 1.1 and 1.2 to show the differences. Comment briefly on any conclusions which may be drawn that could have pricing and profit implications. (8)