Management Accounting

RJ produces and sells two high performance motor cars: Car X and Car Y. The selling prices
are set at £45,000 for Car X and £55,000 for Car Y. The company operates a standard
absorption costing system.

Production costs
The production costs are made up of direct materials, direct labour, and fixed production
overhead. The prime cost (i.e. total direct cost) of X is £30,000 per car and the prime cost of
Y is £32,000 per car.
The total budgeted fixed production overhead is £35,000,000 and is absorbed using a
machine hour rate. It takes 200 machine hours to produce one Car X and 300 machine
hours to produce one Car Y.

The company is considering changing to an activity based costing system in order to

increase its profitability. The company has analysed the budgeted fixed production
overheads and found that the costs for various activities are as follows:

£000
Machining costs 7,000
Set up costs 12,000
Quality inspections 7,020
Stores receiving 3,480
Stores issues 5,500
Total 35,000

The analysis also revealed the following information for next year:
Car X Car Y
Budgeted production (number of cars) 1,100 1,600
Total budgeted machine hours 220,000 480,000
Total number of production runs 110 40
Total number of inspections 2,200 3,200
Total number of component deliveries 492 900
Total number of issues from stores 4,000 7,000

Required:
a) Calculate the budgeted full production cost of one Car X and one Car Y using the
current standard absorption costing system.

b) Calculate the budgeted full production cost of one Car X and one Car Y using the
activity based costing information provided above.

c) Explain how ABC could be used to improve RJ’s profitability.