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Rex Limited manufactures and sells a wide range of spare parts. The company uses absorption costing for both external reporting as well as for individual
Rex Limited manufactures and sells a wide range of spare parts. The company uses absorption costing for both external reporting as well as for individual spare part information for decision-making. However, on the advice of the company's Accountant, management decided to try a system of ABC, while still retaining the traditional costing system. The following information has been obtained from the company: a) Production overhead application rate per direct labour hour for absorption costing used for all parts manufactured is Rs20.00. b) Activity cost pools, cost drivers identified, costs and driver units used for the ABC system: REQUIRED: i) Calculate the cost drivers per unit for each activity cost pool identified. (5 marks) ii) Prepare income statements for parts Alpha and Beta using ABC (ignore costs not allocated to the parts) and calculate the gross margin percentage for Alpha and Beta. (10 marks) iii) Prepare an Income Statement under the absorption costing method. (5 marks) iv) Comment on the result obtained using the two methods of costing
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