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XYZ Ltd. manufactures three products A, B, and C, and has experienced a decrease in profits despite increasing sales. The company has allocated overhead using
XYZ Ltd. manufactures three products A, B, and C, and has experienced a decrease in profits despite increasing sales. The company has allocated overhead using machine hours but is currently considering introducing activity-based costing (ABC). In 2020, the company had the following revenues and expenses. Product C Product A 800,000 Product B 1,000,000 Total 2,900,000 1,100,000 Sales Direct costs Direct materials 500,000 30,000 400,000 50,000 350,000 100,000 1,250,000 180,000 Direct labour Variable overhead 50,000 100,000 280,000 200,000 70,000 770,000 Machine setup Order processing Warehousing costs Depreciation of machines Shipping Contribution Fixed overhead Plant administration Other fixed overhead Profit Machine hours per unit Labour hours per unit Production (units) 200,000 300,000 270,000 4.0 6.0 2.0 5.0 4.0 2.5 11,000 7,000 5,000 23,000 Overheads have been analysed into different activities, and the following costs and relevant cost drivers have been identified by activity. Regardless of the cost allocation method, plant administration and other fixed overhead costs are not allocated to products. Activity Cost driver Product Activity Level Product B Product A 20 30 50 Machine setup Order processing Number of production runs Number of sales orders received 15,000 25,000 10,000 Number of units held in 200 200 400 Warehousing costs Depreciation Shipping inventory Machine hours Number of units shipped 6,000 9,000 20,000 Complete the income statement using the activity cost drivers analysed above. Ensure that you explicitly show the activity overhead rates in your working
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