A company produces four products, details are provided below:
|
Product
|
A |
B |
C |
D |
|
Output in units
|
120 |
100 |
80 |
120 |
|
Costs per unit:
|
£ |
£ |
£ |
£ |
|
Direct Materials
|
40 |
50 |
30 |
60 |
|
Direct Labour
|
28 |
21 |
14 |
21 |
|
Machine hours per unit:
|
4 |
3 |
2 |
3 |
The four products are usually produced in production runs of 20 units and sold in batches of 10 units.
The production overhead is currently absorbed by using a machine hour rate and the total of the production overhead for the period has been analysed as follows:
|
|
£
|
|
Machine department costs (rent, business rates, depreciation and supervision)
|
10430 |
|
Set up costs
|
5250 |
|
Stores receiving costs
|
3600 |
|
Inspection/ Quality control costs
|
2100 |
|
Materials handling and dispatch
|
4620 |
You have ascertained the following cost drivers
|
Set up costs
|
No. of production runs
|
|
Stores receiving
|
Requisitions raised
|
|
Inspection/Quality control
|
No. of production runs
|
|
Materials handling and dispatch
|
Orders executed
|
The number of requisitions raised on the stores was 20 for each product and the number of orders executed was 42, each order being for a batch of 10 of a product.
Required:
a. Calculate the total costs for each product if overhead costs are absorbed on a machine hour basis.
b. Calculate the total costs for each product using an activity based costing approach.
c. Show any differences in the calculations and comment upon the implications.