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The Alfred Co produces three products, X, Y and Z, all made from thesame material. Until now, Alfred Co. has used absorption costing method to
The Alfred Co produces three products, X, Y and Z, all made from thesame material. Until now, Alfred Co. has used absorption costing method to allocate overheads to its products. The company is now considering an activity-based costing system and expected that it will improve profitability. Information for the products (X, Y and Z) for the last year is as follows - X Y Z Production and sales volumes (units) 16,000 12,000 18,000 Selling price/unit $7.50 $12 $13 Raw material usage kg/unit 2 3 4 Direct labour hours/unit 0.1 0.15 0.2 Machine hours/unit 0.5 0.7 0.9 No. of production runs per annum 16 12 8 No. of purchase orders per annum 24 28 42 No. of deliveries to retailers per annum 48 30 62 The price for raw materials remained constant at $ 1.20 per kg and the direct labour cost for the entire workforce was $ 14.80 per hour. The annual overhead costs were as given below: -
Machine set up costs - $ 25,500 Machine running costs - $ 66,400 Procurement costs - $ 48,000 Delivery costs - $ 54,300
Machine set up costs - $ 25,500 Machine running costs - $ 66,400 Procurement costs - $ 48,000 Delivery costs - $ 54,300
(1) In addition to estimating more accurately the true cost of production, Activity Based Costing will also give a better indication of where cost savings can be made.
(2) Traditional absorption costing method tends to under-allocate overhead costs to low volume products. Which of the above statements is/are true?
A. (1) only
B. (2) only
C. (1) and (2)
D. Neither (1) nor (2)
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Step by Step Explanation Given Product X Product Y Product Z Total Production and Sales in units 1600000 1200000 1800000 4600000 x Selling priceunit 750 1200 1300 Sales Amount 12000000 14400000 234000...Get Instant Access to Expert-Tailored Solutions
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