MA – July 2023 – L2 – Q3a – Activity-Based Costing

This question involves calculating the cost driver rates and overhead cost per unit using the Activity-Based Costing (ABC) technique for three products under the 1D1F policy.

Question

The following three products are produced by a company under the “1D1F” policy with additional information provided.

Product	Cee	Dee	Gee
Units	4,000	6,000	4,800
Labour hours per unit	3	2.5	1.5
Number of units in a batch	400	500	600
Number of machine hours per unit	4	5	7

The annual overheads have been grouped under three headings:

Required:
i) Using the Activity Based Costing (ABC) technique, calculate the Cost Driver Rates for each group of overheads.
(6 marks)

ii) Calculate the overhead cost per unit of product “Cee” under the ABC technique.
(4 marks)

Answer

i) Cost Driver Rates Calculation:

Labour related:
- Total labour hours for all products:
  - Cee: 4,000 units x 3 hours/unit = 12,000 hours
  - Dee: 6,000 units x 2.5 hours/unit = 15,000 hours
  - Gee: 4,800 units x 1.5 hours/unit = 7,200 hours
  - Total Labour Hours = 34,200 hours
- Cost driver rate for Labour related overheads:
  - GH¢45,000 / 34,200 hours = GH¢1.32 per labour hour
Batch related:
- Number of batches for all products:
  - Cee: 4,000 units / 400 units/batch = 10 batches
  - Dee: 6,000 units / 500 units/batch = 12 batches
  - Gee: 4,800 units / 600 units/batch = 8 batches
  - Total Batches = 30 batches
- Cost driver rate for Batch related overheads:
  - GH¢69,000 / 30 batches = GH¢2,300 per batch
Machine related:
- Total machine hours for all products:
  - Cee: 4,000 units x 4 hours/unit = 16,000 hours
  - Dee: 6,000 units x 5 hours/unit = 30,000 hours
  - Gee: 4,800 units x 7 hours/unit = 33,600 hours
  - Total Machine Hours = 79,600 hours
- Cost driver rate for Machine related overheads:
  - GH¢120,000 / 79,600 hours = GH¢1.51 per machine hour

(6 marks)

ii) Overhead Cost per Unit of Product “Cee” under ABC:

Cost Component	Calculation	Amount (GH¢)
Labour related overheads	3 hours/unit x GH¢1.32 per hour	3.96
Batch related overheads	GH¢2,300 / 400 units	5.75
Machine related overheads	4 hours/unit x GH¢1.51 per hour	6.04
Total Overhead Cost/unit for Product Cee		15.75

(4 marks)