a. Calculate selling prices for each of the Citizen, the Sovereign and the Excelsior using the absorption costing approach. b. Critically discuss the circumstances in which the use of the activity- based costing approach to the calculation of costs may be appropriate.
You have recently been appointed as Senior Cost Accountant at Maison Ltd, a company which manufactures coffee tables. The company produces three models of coffee table – the Citizen, the Sovereign and the Excelsior.
Selling prices are calculated by adding a 50% mark up to full cost per unit. All three models have the same design but each uses a different wood and some degree of hand finishing, to which the direct labour costs relate. Sales of the Citizen model have been disappointing recently, lagging behind sales of comparable products by competitors.
All three models are produced in batches of 250 units, via the same simple automated process on the same production line. The following data is available:
|
|
Citizen |
Sovereign |
Excelsior |
|
Direct material cost per unit (£) |
30 |
50 |
89 |
|
Direct labour cost per unit (£) |
27 |
31.50 |
36 |
|
Output per month (units) |
2000 |
1750 |
1250 |
Monthly
The company uses absorption costing to calculate costs. Overheads are absorbed on the basis of direct materials costs.
Required:
a. Calculate selling prices for each of the Citizen, the Sovereign and the Excelsior using the absorption costing approach.
b. Critically discuss the circumstances in which the use of the activity- based costing approach to the calculation of costs may be appropriate.
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