Jones Ltd produces four products, namely Pl, P2, P3 and P4. The following figures represent the budget information per unit of each product:
|
|
Annualvolume
|
|
Material per unit
|
|
Direct labour hours
|
|
Selling priceper unit
|
|
(units)
|
|
£
|
|
per unit
|
|
£
|
|
P1
|
100
|
|
60
|
|
5
|
|
110
|
|
P2
|
1,000
|
|
60
|
|
5
|
|
110
|
|
P3
|
100
|
|
180
|
|
15
|
|
330
|
|
P4
|
1,000
|
|
180
|
|
15
|
|
330
|
The budgeted cost per direct labour hour is £5. The company currently absorbs overheads into products on the basis of a direct labour overhead absorption rate. The budgeted overhead for the year is £66,000 and the amount related to each activity is shown below:
Annual Annual consumption of overhead Cost cost driver by product
Activity cost (£) driver P1 P2 P3 P4 Total
|
Setting up
|
30,000
|
Number of
|
2
|
10
|
5
|
13
|
30
|
|
jobs
|
|
set ups
|
|
|
|
|
|
|
Ordering
|
15,000
|
Number of
|
4
|
4
|
2
|
5
|
15
|
|
material
|
|
material
|
|
|
|
|
|
|
|
|
orders
|
|
|
|
|
|
|
Material handling
|
21,000
|
Number of times
|
6
|
50
|
20
|
24
|
100
|
|
|
|
material
|
|
|
|
|
|
|
|
|
handled
|
|
|
|
|
66,000
|
The company uses a full cost plus pnong system. The sales manager of the company is currently worried about P4 since sales of this product seem to be under pressure from competitors in a market which is becoming particularly price sensitive.
You are required to:
(a) Calculate the unit cost per product using the company's tradi tional method of absorbing overheads into products.
(b) Calculate the unit cost per product using activity based costing as the method of absorbing overhead costs into the products.
(c) Discuss the results disclosed by a comparison between the two methods of absorbing overheads into the products and the implications for the company.