Short Answer Question 3 - Overhead Allocation (10 marks)

Burson Auto Parts manufactures two products X2 and X6 at its Victorian plant. The company currently uses a traditional normal costing system to cost its products. Manufacturing overhead is allocated using a plant-wide rate based on machine hours.

The new management accountant has suggested the company determine cost more accurately by using an activity-based costing (ABC) system. The accountant has estimated the following data for its two products for next year:

Item

Units produced and sold Direct Material cost

Direct labour cost per hour Direct labour hours/unit Activities:

Machine hours

Number of times handled Number of parts

Number of product setups

X2 X6 Total

50,000 100,000 150,000 $120/unit $140/unit

$10/hr $15/hr

2hrs/unit 3hrs/units

100,000 200,000 300,000 40,000 20,000 60,000 12,000 8,000 20,000 8,000 6,000 14,000

The accountant has budgeted indirect manufacturing costs, at the level of activity (refer to the table above) required for the next year's forecast sales, as follows:

Cost Pool

Machining Handling Number of parts Setups

Total overhead Required:

Activity Costs

$ 4,200,000 $ 1,800,000 $ 2,300,000 $ 2,800,000 $11,100,000

1. Using the company's current traditional normal costing system, calculate the manufacturing cost of one unit of each product, X2 and X6.
2. Calculate the manufacturing cost of one unit of each product, X2 and X6, if the company uses activity-based costing using the four activity cost pools identified above and the appropriate driver.

iii.

1. Briefly explain why the unit costs calculated in (i) and (ii) above differ and
2. Explain the impact of continuing to use the traditional plantwide rate may have on
3. management devision and company performance in the competitive market.