3ACC0809 INTRODUCTION TO MANAGEMENT ACCOUNTING

TUTORIAL 7

Question 1

A company manufactures 2 products, L and M, using the same equipment and similar
processes. An extract of the production data for these products in one period is shown below.

L M
Quantity produced (units) 5,000 7,000
Direct labour hours per unit 1 2
Machine hours per unit 3 1
Set-ups in the period 10 40
Orders handled in the period 15 60

Overhead costs: $
Relating to machine activity 220,000
Relating to production run set-ups 20,000
Relating to handling of orders 45,000
285,000

REQUIRED:
Calculate the production overheads to be absorbed by one unit of each of the products using
the following costing methods:
a. Traditional costing approach using direct labour hour rate to absorb overheads
b. ABC approach, using suitable cost drivers to trace overheads to products

[ACCA, F5, BPP]

Question 2

Una manufactures three products: A, B, and C.

Data for the period just ended is as follows:

A B C
Production units 20,000 25,000 2,000
Sales price (per unit) $20 $20 $20
Material cost (per unit) $5 $10 $10
Labour hours (per unit) 2 hours 1 hour 1 hour

[Labour is paid at the rate of $5 per hour]

Overheads for the period were as follows:

$
Set-up costs 90,000
Receiving 30,000
Despatch 15,000
Machining 55,000
190,000

Cost driver data:

A B C
Machine hours per unit 2 2 2
No. of set-ups 10 13 2
No. of deliveries received 10 10 2
No. of orders despatched 20 20 20

REQUIRED:
a. Calculate the cost (and hence profit) per unit, absorbing all the overheads on the basis of
labour hours.
b. Calculate the cost (and hence profit) per unit absorbing the overheads using an Activity
Based Costing approach.