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MA – L2 – Q12a – Activity-based costing

Calculate product costs for two products using traditional absorption costing based on machine hours.

Question

MCC has total budgeted production overheads for next year of GH₵816,000 and has traditionally absorbed overheads on a machine hour basis. It makes two products, Product A and Product B.

	Product A	Product B
Direct material cost per unit	GH₵20	GH₵60
Direct labour cost per unit	GH₵50	GH₵40
Machine time per unit	3 hours	4 hours
Annual production	6,000 units	4,000 units

Required:
(a) Calculate the product cost for each of the two products on the assumption the firm continues to absorb overhead costs on a machine hour basis.

The company is considering changing to an activity based costing (ABC) system and has identified the following information:

	Product A	Product B
Number of setups	18	32
Number of purchase orders	48	112

Overhead cost analysis	GH₵
Machine-related overhead costs	204,000
Setup related overhead costs	280,000
Purchasing-related overhead costs	332,000
Total production overheads	816,000

Required:
(b) Calculate the unit cost for each of the two products on the assumption that the firm changes to an ABC system, using whatever assumptions you consider appropriate.

Answer

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Tags: Absorption costing, Activity Based Costing, Cost drivers, Overhead allocation, Production costing
Level: Level 2

Topic: Activity-based costing

MA – L2 – Q11 – Activity-based costing

Calculate budgeted production cost per unit for products using traditional and activity-based costing methods.

Question

ADDO COMPANY
ADDO Company has a single production process, for which the following costs have been estimated for the period ending 31st December Year 7:

	GH¢
Material receipt and inspection costs	31,200
Power costs	39,000
Material handling costs	27,300

ADDO Company makes three products – X, Y, and Z. These products are made by the same group of employees, using power drills. The employees are paid GH¢8 per hour. The following budgeted information has been obtained for the period ending 31st December Year 7:

	Product X	Product Y	Product Z
Production quantity (units)	2,000	1,500	800
Batches of material	10	5	15
Direct material (metres)	5	3	4
Direct material cost (GH¢)	6	4	6
Direct labour (minutes)	30	20	15
Number of power drill operations (per unit)	3	2	3

Overhead costs are currently absorbed into the cost of production units using an absorption rate per direct labour hour. A factory-wide absorption rate is used for work in all the production departments.
An activity-based costing investigation has revealed that the cost drivers for the overhead costs are as follows:

Material receipt and inspection: number of batches of material
Power: number of power drill operations
Material handling: quantity of material (metres) handled.

Required:
Prepare a summary of the budgeted production cost per unit for each of the products X, Y, and Z for the period ending 31 December Year 7:
(a) using the existing method for the absorption of overhead costs, and
(b) using an approach based on activity-based costing, and the information available about cost drivers.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Activity Based Costing, Cost allocation, Cost drivers, Overhead absorption, Production costing
Level: Level 2

Topic: Activity-based costing

Tag (SQ): Cost drivers

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MA – L2 – Q12a – Activity-based costing

Calculate product costs for two products using traditional absorption costing based on machine hours.

MA – L2 – Q11 – Activity-based costing

Calculate budgeted production cost per unit for products using traditional and activity-based costing methods.

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MA – L2 – Q12a – Activity-based costing

Calculate product costs for two products using traditional absorption costing based on machine hours.

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MA – L2 – Q11 – Activity-based costing

Calculate budgeted production cost per unit for products using traditional and activity-based costing methods.

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