Question 2 [100 marks]

In Jasmine Ltds production cost centre, two units are produced: Unit Aand Unit B, the total overhead cost being 1000. This is made up of two costs:

1. Machine set-up costs of 800; and

2. Inspection costs of 200.

Overhead is absorbed on the basis of direct labour hours. The total direct labour hours (DLH) amount to 200 DLH.

1. Unit A requires 150 DLH; and

2. Unit B 50 DLH.

The machinery for Unit A only needs to be set-up once whereas Unit Brequires nine set-ups. Unit A and Unit B both require two inspections each.

Required

a) Calculate the overhead recovery charge that should be made to each product, based on:

1. Absorption costing method based on Direct Labour Hours. [20 marks]

2. The ABC method based on machine set-up costs and inspection costs.

   [50 marks]

b) Show the comparison of each method and write a short note explaining

why the difference occurs.

[30 marks]