QUESTION 2

MHM Manufacturing Company is currently engaged in the production of three products; A, B and C. These products use the same raw materials, though the consumption of quantity differs. Details of quantity required to each product in terms unit and labour hours provided as below:

	A	B	C
Direct Material (Units consumed)	2	3	4
Direct Labour (No. of hours)	2	3	2

Direct materials cost RO 3.2 per unit while the direct labour costs are RO 2.5 per hour.

For many years, the company has been using absorption costing for allocating overheads. The basis of allocation used was the total labour hours.

The budgeted production of these products are given below

	A	B	C
Budgeted Production	5,000	6,000	10,000

Details of overhead are given below.

	Total
Machine Set Up Costs	25,000
Procurement expenses	30,000
Machine running costs	55,000
After Sales Support	20,000

Details of the cost drivers are given below;

	A	B	C
No. of machine set up	40	30	30
No. of purchase orders	300	400	300
Machine hours per unit	2	4	6
No. of visits to the customer	100	150	50

You are required to calculate: -

1. Cost per unit for each product using Absorption costing
2. Cost per unit for each product using ABC
3. Identify products for which under costing and/or over costing is observed. [5 Marks]