QUESTION TWO

Having attended a course on activity based costing (ABC) you decide to experiment by applying the principles of ABC to the four products currently made and sold by your company. Details of the four products and relevant information are given below for one period.

Product

A

B

C

D

units

120

100

80

120

Direct material

40

50

30

60

Direct labour

28

21

14

21

Machine hours per unit (hours)

4

3

2

3

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 analyzed as follows:

Ksh

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

Materials handling and dispatch

4,620

26,000

You have ascertained that the cost drivers to be used are as listed below for the overhead costs shown:

CostsCost driver

Set up costs Stores receiving Inspection/Quality control

Materials handling and dispatch

Number of production runs

Requisitions raised

Number of production runs

Orders executed

The number of requisitions raised on 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.

Required:

a)Calculate the total costs for each product if all overhead costs are absorbed on a machine hour basis.(4 Marks)

b)Calculate the total costs for each product using activity based costing(8 Marks)

c)Calculate and list the unit product costs from your figures in (a) and (b)(4 Marks)

d)Comment briefly on any conclusions which may be drawn which could have pricing and

profit implications