QUESTION 40 The budgeted information for SELKS PRODUCTS ple for Period 8 in 2008 is as follows: Sales and production units Unit sales price Price cost per unit (direct materials & direct labour). Machine Dept. (machine hours per unit) Assembly Dept. (assembly labour hours per unit) Products Y Z X 5,000 units 4,000 units 3,000 units 106 56 85 633 84. 66 2 hours 5 hours 4 hours 7 hours 3 hours 2 hours The overheads allocated and apportioned to the Machinery and Assembly departments were recovered on the basis of a machinery overhead recovery rate of 3.50 per machine hour and 1.00 per assembly labour hour The Managing Director has requested that you investigate the computation of product profits for Period 8 on the basis of Activity Based Costing and then compare these profits with the profits calculated using the traditional absorption basis currently used by SELKS PRODUCTS plc. You have agreed with the Managing Director that five cost pools be created as follows: Machining Dept. Assembly Dept. Set-up costs Customer order processing Purchases order processing. The following is an analysis of the overheads with their appropriate cost drivers: Cost Driver Cost pool Machining Dept. 84,000 Machine hours 42,000 Assembly Dept. 26,500 Assembly labour hours 53,000 Set-up costs 34,500 Number of set-ups 50 Customer order processing 32,600 Number of customer orders 326 Purchases order processing 22,400 Number of purchases orders 112 200,000 The product cost driver analysis is as follows: Number of set-ups Number of customer orders Number of purchases orders Required: (a) (b) (c) Products 12 X Y Z Total 10 20 20 50 80 86 160 326 30 40 42 112 Calculate the profit per unit for each product if overheads are absorbed on the traditional basis. Calculate the profit per unit for each product if overheads are absorbed using activity based costing. With regard to Product Z, discuss why there is a difference between the profit/loss shown on a traditional basis with that shown using activity-based costing.