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Titan PLC produces two products (Alpha and Beta) which use similar materials and production techniques. The company has planned to increase its output to 1,000
Titan PLC produces two products (Alpha and Beta) which use similar materials and production techniques. The company has planned to increase its output to 1,000 units of Alpha and 2,000 units of Beta in the coming year. Titan PLC faces severe price competition and the prevailing market price for products similar to Alpha and Beta is 190 and 140 per unit respectively Table 1 Beta 1,0002,000 E30 Alpha Budgeted Volume (units) Material cost per unit E20 4 4 Direct Labour hours Machine hours 6 Direct labour cost per hour 15 The sales manager contends that Alpha makes a profit of 50/unit and Beta is making a profit of E5/unit (based on absorption of the 240,000 overheads on a machine hour basis). The management accountant has advised the managing director that the company is making a loss on Alpha of 50/unit and it is Beta that is making a profit of 55/unit (based on absorption of the E240,000 overheads on a direct labour hour basis) The managing director, who was deeply concerned that a costing system could produce such conflicting advice, has employed a consultant who has advised him that Activity Based Costing (ABC) will provide a sounder basis for decision making. The consultant has identified the following pattern of overhead resource consumption Table 2 Production Overhead Analysis Costs relating to machine set-ups Costs relating materials handling Costs relating to product inspection Machine maintenance costs Cost relating to catering and health and safetv 30 25 20 10 100% It is expected that on the basis of the budgeted product output the following activities will occur Table 3 (Activities) AlaB Number of machine setups 60 Number of materials handlings Number of inspections Total 120 100 60 60 40 40 80 120 NB1 "Machine maintenance costs " are expected to vary with the machine hours worked in the production of Alpha and Beta NB2 Costs relating to catering and health and safety" are expected to vary with direct labour hours worked Required (i) Produce product costings, using the traditional overhead absorption methods alluded to by the management accountant and the sales manager, confirming their conflicting claims about the profitability of Alpha and Beta (5 marks) (ii) Produce product costings for Alpha and Beta using the ABC approach (20 marks) (b)Comment on the costings obtained in (a) (i) and (a) (ii) particularly in relation to the usefulness of the different approaches in the context of decision-making and control for Titan PLOC (5 marks) (Total marks 30)
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