Question
Winda Sdn. Bhd. is a manufacturing company that produces three products: P1, P2 and P3. Each uses the same resources, but in different quantities as
Winda Sdn. Bhd. is a manufacturing company that produces three products: P1, P2 and P3. Each uses the same resources, but in different quantities as shown in the table of budgeted data for the year 2014 below:
Products P1 P2 P3
Budgeted production 1,500 2,500 4,000
Direct labour hours per unit 2 4 3
Machine hours per unit 2 2 3
Batch size 50 100 500
No. of machine set up per unit 2 3 1
No. of purchase orders per batch 4 4 6
No. of material movement per batch 10 5 4
Direct material per unit (RM) 120 190 140
Winda's budgeted production overhead costs for 2014 are RM400,000 and current practice is to absorb these costs into product costs using an absorption rate based on direct labour hours. As a result the production overhead costs attributed to each product unit is;
P1: RM32 P2: RM64 P3: RM48
The management of Winda is considering changing to an activity based method of attributing overhead costs to products and as a result have identified the following costs drivers and related cost pools:
Cost pool RM Cost Driver
Machine maintenance 100,000 Machine hours
Machine setups 70,000 Machine setups
Purchasing 90,000 Purchase orders
Material handling 60,000 Material movements
The remaining RM80,000 of overhead costs are caused by a number of different factors and activities that are mainly labour related and are to be attributed to products on the basis of labour hours.
Required:
A. Calculate the production cost per unit of each product using traditional costing method.
B. Calculate the production cost per unit of each product unit using an activity based approach
C. Discuss the practical problems that may be encountered in the implementation of an activity-based system of product cost management
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