MI – May 2017 – L1 – SB – Q1 – Costing Techniques

Compare production costs using traditional absorption costing and activity-based costing.

Question

LADECK Nigeria Limited makes and sells two products A and B. The company is considering the introduction of an activity-based costing approach to facilitate efficient cost allocation, improvement in cost accuracy, and reduction.

The following information is provided in respect of production and sales for the next period:

	PRODUCT A	PRODUCT B	TOTAL
Production and sales (units)	40,000	20,000	60,000
Direct material cost/unit	N25	N20	N1,400,000
Direct labour hours	3	4	200,000
Machine hours	2	5	180,000
Number of production runs	15	25	40
Number of component receipts	70	90	160
Number of production orders	30	20	50

The direct labour hour is paid at N8 per hour.

Budgeted production overhead is absorbed using a direct labour hour rate, and the budgeted overhead is expected to be as follows:

Cost Pool	Amount	Cost Driver
Machine	N900,000	Machine hours
Set-up costs	N140,000	Production runs
Carriage inwards	N280,000	Company receipts
Packaging	N200,000	Production orders
	N1,520,000

Required:

a. Calculate the full production costs for the two products using traditional absorption costing (absorbing production overhead on a direct labour hour basis). (6 Marks)
b. Calculate the full production costs for the two products using the activity-based costing approach. (14 Marks)

Answer

a) LADECK NIGERIA LIMITED
TRADITIONAL ABSORPTION COSTING