Question
XYZ (Pty) Ltd is a company making three products namely, product A, B and C. XYZ (Pty) Ltd has been incurring large losses on products
XYZ (Pty) Ltd is a company making three products namely, product A, B and C. XYZ (Pty) Ltd has been incurring large losses on products B and C compared to product A. The losses have been a concern to each product’s line management since their performance bonus is based on the Return on Assets (ROA). All three product have similar prime costs. However, while going through their financial records, using the traditional method of allocating manufacturing overheads where manufacturing machine hours are used as the cost driver, you discovered that fixed costs are much higher for product B and C compared to product A.
You are provided with the following information regarding the three products:
Product A | Product B | Product C | ||
---|---|---|---|---|
Annual production (units) | 65 000 | 102 000 | 80 000 | |
Batch size (units) | 20 | 25 | 100 | |
Number of machine set-ups per batch | 7 | 2 | 4 | |
Number of inspections per batch | 6 | 2 | 10 | |
Machine hours per unit | 15min | 15min | 25min | |
Manufacturing overheads | R340 000 | |||
% of annual machine set-ups costs to total overheads | 40% | |||
% of annual inspection costs to total manufacturing overheads | 60% |
Using the Activity Based Costing (ABC) principle of allocating overheads, calculate the total manufacturing cost allocated to each product produced by XYZ (Pty) Ltd.
Calculate the manufacturing overheads allocated to each product using the Traditional method of allocating overheads.
Round all your answer to nearest two decimals.
Overhead allocation to each each activity:
Machine set-up | RAnswer |
---|---|
Inspection | RAnswer |
Product A | Product B | Product C | |
---|---|---|---|
Activity Based Costing | |||
Machine set-up costs | RAnswer | RAnswer | RAnswer |
Inspection costs | RAnswer | RAnswer | RAnswer |
Total Manufacturing costs | RAnswer | RAnswer | RAnswer |
Traditional method | |||
Total number of machine hours | Answer hrs | Answer hrs | Answer hrs |
Indirect cost using traditional method | RAnswer | RAnswer | RAnswer |
Expert Answe
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