Question 4

Copra Ltd manufactures three products Q, R and S. Below are the output and cost data for the period just ended.

	Output	No. of production runs	Material cost per unit ()	Direct labour hours per unit	Machine hours per unit
Q	20	2	30	1	1
R	10	3	60	3	3
S	100	4	80	3	3
		9

The direct labour cost per hour is 10. The overhead costs for the period are as follows:

Overhead costs
Variable costs	2,960
Set-up costs	11,220
Initiating and scheduling costs	9,300
Material handling costs	8,020
	31,500

• a.From the information above, calculate an absorption rate for overheads based on direct labour hours.
• b.Using an absorption costing approach, and the absorption rate calculated in (a) above, calculate the cost per unit for each of Q, R and S.
• c.Using activity-based costing, calculate the cost per unit for each of Q, R and S. Assume that the number of production runs is the cost driver for set-up costs, initiating and scheduling costs and materials handling costs, while machine hours are the cost driver for overhead variable costs. Show the allocation of each overhead cost to each product in your workings
• d.Calculate the difference per unit cost between an absorption costing and an activity-based costing approach for each of Q, R and S.
• e.Calculate the difference for the total cost of production between an absorption costing and an activity-based costing approach for each of Q, R and S.
• f.Discuss whether the traditional absorption costing system for calculating the manufacturing cost of a product for Copra Ltd is flawed.