Question 1 XYZ Ltd. currently make and sells four products. They provide you with their details and relevant information for one period in the following table. As you have recently just learnt about activity- based costing (ABC) you decide to experiment by applying the principles of ABC to the four products. Product C Outputs in Units 120 100 80 120 Cost per unit (E) () () () Direct material 40 50 30 60 Direct labour 28 21 14 21 Machine hours (per unit) 3 2 3 You have ascertained that the 'cost drivers' to be used are as listed below for the overhead costs shown: Cost Set-up costs Stores receiving Inspection/Quality control Material handling and dispatch Cost Driver Number of production runs Requisition raised Number of production runs Orders executed 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: 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 Material handling and dispatch 4,620 | Question continues on next page The number of requisitions raised in the stores was 20 for each product and the number of orders executed was 42, each order being for a batch of 10 of a product. You are required a. to calculate the total costs for each product if all overhead costs are absorbed on a machine hour basis; (8 marks) b. to calculate the total costs for each product using activity-based costing; (14 marks) c. to calculate and list the unit product costs from your figures in (a) and (b) above, to show the differences and comment briefly on any conclusions which may be drawn which could have pricing and profit implications. (5 marks) d. Large service organisations, such as banks and hospitals, used to be noted for their lack of standard costing systems, and their relatively unsophisticated budgeting and control systems compared with large manufacturing organisations. But this is changing and many large service organisations are now revising their use of management accounting techniques. Requirement: Explain the uses of activity-based costing in the service industries. (6 marks) Total (33 marks)