ABC Ltd currently produces two ranges of products called FT and PT. The two products use the same equipment and similar processes to produce. An extract of the production data for these products in one period is shown below. FT £ Quantity produced (units) Direct material cost per unit Direct labor hours per unit (hours) Machine hours per unit (hours) Number of set-ups in the period Orders handled in the period 10,000 5 1 3 4 34 £ 528,000 128,000 104,000 760,000 PT £ 14,000 7.5 2 1 28 70 Overhead cost Relating to machine activity Relating to production run set-up Relating to handling of orders Total Direct labor is paid at $8 per hour. Required (a) Calculate total production cost of FT and PT, using the following costing methods: (i) A traditional absorption costing approach using a direct labour hour rate to absorb overhead. (ii) An activity based costing (ABC) approach, using suitable cost drivers to trace overhead to products. (b) Discuss the appropriateness of using absorption costing and ABC, referring to the question scenario and the results in part (a) above.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
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