A company is looking to launch a new product line, which requires new facilities to be used and at the moment has two planned products, called ‘Basic’ and ‘Super’. The cost per unit is planned as follows: Basic Super Direct materials £20 £24 Direct labour £14 £16 While using the absorption costing approach, the company uses machine hours as the basis to charge its production overheads. One unit of Basic will use 3 machine hours while one unit of Super will use 4 machine hours. The business sells these products at a price that gives a standard profit mark-up of 30% of full cost. For the coming year, the company expects to make and sell 8,000 units of Basic and 6,000 units of Super. If the company adopts the ABC approach, the details relating to the planned production overheads are as follows: Activity Cost Driver Number of Activities Total Production Overheads Total Basic Super Materials ordering Number of orders 100 70 30 £20,000 Materials issuing Number of issues 400 160 240 £30,000 Machining Machine hours 48,000 24,000 24,000 £170,000 Finishing Labour hours 20,000 8,000 12,000 £120,000 Total £340,000 Required: Critically assess the key distinctions between absorption costing (traditional method) and ABC approaches relating to the assignment of production overheads, with appropriate examples
A company is looking to launch a new product line, which requires new facilities to be used and at the moment has two planned products, called ‘Basic’ and ‘Super’. The cost per unit is planned as follows:
Basic Super
Direct materials £20 £24
Direct labour £14 £16
While using the absorption costing approach, the company uses machine hours as the basis to charge its production
The business sells these products at a price that gives a standard profit mark-up of 30% of full cost. For the coming year, the company expects to make and sell 8,000 units of Basic and 6,000 units of Super.
If the company adopts the ABC approach, the details relating to the planned production overheads are as follows:
|
Activity |
Cost Driver |
Number of Activities |
Total Production Overheads |
||
|
Total |
Basic |
Super |
|||
|
Materials ordering |
Number of orders |
100 |
70 |
30 |
£20,000 |
|
Materials issuing |
Number of issues |
400 |
160 |
240 |
£30,000 |
|
Machining |
Machine hours |
48,000 |
24,000 |
24,000 |
£170,000 |
|
Finishing |
Labour hours |
20,000 |
8,000 |
12,000 |
£120,000 |
|
Total |
£340,000 |
Required:
Critically assess the key distinctions between absorption costing (traditional method) and ABC approaches relating to the assignment of production overheads, with appropriate examples
Step by step
Solved in 2 steps
