1. A codeless phone manufacturing company uses activity based costing.

For simplicity,
accountants developed only three activities and related cost drivers for indirect production
costs.
Cost pools/Activity Cost drivers
Material handling Direct material costs
Engineering Engineering change notices
Power Kilowatt Hours
The company produces three types of phones. X, Y and Z product for a recent month are
as follows.
Products X Y Z
Production Units 15,000 10,000 20,000
Direct material costs $40,000 $150,000 $150,000
Direct labour costs $40,000 $10,000 $30,000
Kilowatt hours 5,000 20,000 15,000
Engineering changes notices 10 5 5
The indirect production costs/overheads for the month are as follows.
Material handling $80,000
Engineering $20,000
Power $80,000
Total $180,000
Required:
a. Compute product cost of each product under traditional costing using units of
production.
b. Compute product cost of each product under activity based costing system. Which
product is over-costed and under-costed?

2. XYZ plc manufactures four products, namely A, B, C, and D, using the same plant and
processes. The following information relates to a production period.

Product Volume/ Material cost Direct labour Machine time Labour cost
unit per unit per unit per unit per hour
A 500 $ 5 1/2 hour 1/4 hour $ 3
B 5000 5 1/2 hour 1/4 hour 3
C 600 16 2 hours 1 hour 12
 D 7000 17 1.5 hours 1.5 hours 9

Total production overhead recorded by the cost accounting system is analyzed under the
following headings.
Factory overhead applicable to machine-oriented $37,424 MH
activity $4,355 No of set ups
Set-up costs $1,920. no of orders
The cost of ordering materials is $7,580 No of handles
Handling materials costs $8,600 no of spare parts
Administration for spare parts costs

However, investigation into the production overhead activities for the period reveals the
following totals:
Produc Number Number of Number of Number of
t of set- material material handled spare parts
ups orders
A 1 1 2 2
B 6 4 10 5
C 2 1 3 1
D 8 4 12 4

Required: Compute cost per unit of each product under

A. Traditional costing using Machine Hours
B. Activity-based costing tracing overheads to products by means of cost drivers.

3. Duo plc produces two products A and B. Each has two components specified as sequentially
numbered parts i.e. product A (parts 1 and 2) and product B (parts 3 and 4). Two production
departments (machinery and fitting) are supported by five service activities (material
procurement, material handling, maintenance, quality control and set up). Product A is a
uniform product manufactured each year in 12 monthly high volume production runs.
Product B is manufactured in low volume customized batches involving 25 separate
production runs each month. Additional information is as follows:

Product A Product B
Production details:
Components Parts 1,2 Parts 3,4
Annual volume produced 300,000 units 300,000 units
Annual direct labor hours:
Machinery department 500,000 DLH 600,000 DLH
Fitting department 150,000 DLH 200,000 DLH
 Overhead cost analysis (Rs. 000)
Material Handling 1,500
Material procurement 2,000
Set-up 1,500
Maintenance 2,500
Quality control 3,000
Machinery (machinery power, depreciation, etc.)a 2,500
Fitting (machine, depreciation, power, etc.)b 2,000
15,000

a
It may be assumed that these represent fairly homogeneous activity-based cost pools.
b
It is assumed these costs (depreciation, power, etc) are primarily production volume driven
and that direct labor hours are an appropriate surrogate measure of this.

Cost driver analysis

Annual cost driver volume per component
Cost driver Part 1 Part 2 Part 3 Part 4
Material movements 180 160 1000 1200
Number of orders 200 300 2000 4000
Number of set-ups 12 12 300 300
Maintenance hours 7000 5000 10000 8000
Number of inspections 360 360 2400 1000
DLH (Machinary) 150000 350000 200000 400000
DLH (Fitting) 50000 100000 60000 140000
Your are required to compute the unit costs for products A and B using an activity based costing
system.