A business is considering changing from absorption costing to Activity Based Costing.

It makes four different products as outlined below:

Product A B C D
Output in units 120 100 80 120
Machine hours per unit 4 3 2 3

Costs per unit £ £ £ £

Direct material 40 50 30 60
Direct labour 28 21 14 21

The four products are similar, 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 10,430
Set-up costs 5,250
Stores 3,600
Quality control 2,100
Materials handling 4,620

The cost drivers to be used in the ABC experiment are listed below.

Cost Driver
Set-up costs Number of production runs
Stores Requisitions raised
Quality control Number of production runs
Materials handling Orders completed

The number of requisitions raised on the Stores was 20 for each product
and the number of orders executed was 42 with each order being for a batch of 10

Required
Calculate the total costs for each product if all overhead costs are absorbed on a machine hour basis.
Calculate the total costs for each product using Activity Based Costing.
Calculate the unit product costs from both methods and compare the results of the two methods.
 products.

e hour basis.
Traditional Method based on machine hours

Total Overheads 26,000

Total Machine Hours 1300

Absorption rate £ 20.00 per hour

Machining Dept
Overhead 10,430
MH Driver 1300 8.02

Set up costs Overhead 5,250

Prod runs Driver 21 250

Stores
Overhead 3,600
Requisitions Driver 80 45

Quality Control Overhead 2,100

Prod runs Driver 21 100

Materials Handling
Overhead 4,620
Orders Driver 42 110

Activity £ Driver A B C
Machining 10430 MH 3851 2407 1284
Set up 5250 Prod runs 1500 1250 1000
Stores 3600 Requisitions 900 900 900
Quality 2100 Prod runs 600 500 400
Material 4620 Orders 1320 1100 880
26000 8171 6157 4464

Units produced 120 100 80

ABC o/h per unit 68.09 61.57 55.80

Trad o/h per unit 80.00 60.00 40.00

direct material 40.00 50.00 30.00

direct labour 28.00 21.00 14.00

full cost traditional method 148.00 131.00 84.00
full cost ABC 136.09 132.57 99.80
 D
2888
1500
900
600
1320
7208 26000

120

60.07

60.00

60.00

21.00
141.00
141.07