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ABC Questions 2024

This document provides information on a manufacturing company, ABC Ltd., that makes three products: P, Q, and R. It includes sales prices, direct material and labor costs, overhead costs and their allocated amounts, and cost driver information for each product. The question asks to calculate the cost and gross profit per unit for each product using activity-based costing, allocating overhead costs based on the provided cost driver information for each product.

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199 views5 pages

ABC Questions 2024

This document provides information on a manufacturing company, ABC Ltd., that makes three products: P, Q, and R. It includes sales prices, direct material and labor costs, overhead costs and their allocated amounts, and cost driver information for each product. The question asks to calculate the cost and gross profit per unit for each product using activity-based costing, allocating overhead costs based on the provided cost driver information for each product.

Uploaded by

wambualucas74
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Illustration III

Having attended a course on activity-based costing (ABC) you decide to


experiment by applying the principles to the four products currently made and
sold by your company. Details of the four products and relevant information are
given below for one period:

The four products are similar and 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 over head
has been analysed as follows:

You have ascertained that the ‘cost drivers’ to be used are as listed below for
the
overhead costs shown:
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 all overhead costs are absorbed on
a
machine hour basis.
b. Calculate the total cost of each product, using activity-based costing.
c. Calculate and list the unit product costs from your figures in (a) and (b)
above, to
show the differences and comment briefly on any conclusions which may be
drawn
which could have pricing and profit implications.

(b) The Marima Manufacturing Company produces four products; W, X, Y


and Z using the same plant and processes.

The following information relates to the company:

Product W X Y Z
Volume (units) 1,000 10,000 1,200 14,000
Material cost/unit 10 10 32 34
(Sh.) 1 1 4 3
Direct labour/unit ½ ½ 2 3
(hours) 6 6 24 18
Machine time/unit
(hours)
Labour cost/unit (Sh.)
The cost accountant analysed the production overheads recorded under
the following headings:

Overhead costs: Sh.’000’


Factory overhead (machine-oriented activity) 74,848
Set-up costs 8,710
Material costs:
Cost of ordering materials 3,840
Materials handling costs 15,160
Administration costs for spare parts. 17,200

Overhead costs are absorbed by products on a machine hour rate of


Sh.9.60 per hour giving an overhead cost per unit for the products as
follows:

Product W X Y Z
Shillings 2.40 2.40 9.60 14.40

Investigations into the production overhead activities for the period reveal the
following totals:

Product W X Y Z
Number of set-ups 2 12 4 16
Number of material orders 2 16 2 16
Number of times material was 4 20 6 24
handled 4 10 2 8
Number of spare parts used

Required:
(i) Unit costs per product using activity-based costing tracing costs to
production units by means of cost drivers.
(6 marks)
(ii) Comment briefly on the differences disclosed between overheads
traced by the present system and those traced by activity based costing.

c) ABC Lt. Is a manufacturing company that makes only three products


P, Q, and R. Data for the period ended last month are as follows:

P Q R

Units produced and 12,000 16,000 8,000


sold

Sh. Sh. Sh.

Sales price per unit 50 70 60


Direct material cost 16 24 20
per unit
Direct labour cost per 8 12 8
unit

Production overheads Total Cost drivers


costs
Sh. Machine hours
Machining costs 102,000 Machine hours
Production scheduling 84,000 Number of production runs
Set-up costs 54,000
Quality control 49,200 Number of production runs
Receiving materials 64,800 Number of components
receipts
Packing materials 36,000 Number of customer orders
390,000

Information on the cost drier is given as follows:

P Q R

Direct labour hours per unit 1 1½ 1

Machine hours per unit ½ 1 1½

Number of components per unit 3 5 8


Number of component receipts 18 80 64

Number of customer orders 6 20 10

Number of production runs 6 16 8

Required:
Using activity based costing (ABC) show the cost and gross profit per unit for
each product during the period.

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