Activity Based Costing The Desirable Luggage Company produces two products, the Paris and the Milan, using the same equipment and similar processes. An extract of the production data for these products in one period is shown below: Paris Milan Quantity produced (units) 5,000 7,000 Direct labour hours per unit 1 2 Machine hours per unit 3 1 Set-ups in the period 10 40 Orders handled in the period 15 60 Overhead costs £ Relating to machine activity 220,000 Relating to production run set-ups 20,000 Relating to handling of orders 45,000 285,000 Calculate the production overheads to be absorbed by one unit of each of the products using the following costing methods: (a) A traditional absorption costing approach, using a direct labour hour rate to absorb overheads. (b) An activity based costing approach, using suitable cost drivers to trace overheads to products. (c) Comment briefly on the key difference in how ‘fairly’ overheads are absorbed under each method.
Activity Based Costing The Desirable Luggage Company produces two products, the Paris and the Milan, using the same equipment and similar processes. An extract of the production data for these products in one period is shown below: Paris Milan Quantity produced (units) 5,000 7,000 Direct labour hours per unit 1 2 Machine hours per unit 3 1 Set-ups in the period 10 40 Orders handled in the period 15 60 Overhead costs £ Relating to machine activity 220,000 Relating to production run set-ups 20,000 Relating to handling of orders 45,000 285,000 Calculate the production overheads to be absorbed by one unit of each of the products using the following costing methods: (a) A traditional absorption costing approach, using a direct labour hour rate to absorb overheads. (b) An activity based costing approach, using suitable cost drivers to trace overheads to products. (c) Comment briefly on the key difference in how ‘fairly’ overheads are absorbed under each method.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Activity Based Costing The Desirable Luggage Company produces two products, the Paris and the Milan, using the same equipment and similar processes. An extract of the production data for these products in one period is shown below:
| Paris | Milan | |
| Quantity produced (units) | 5,000 | 7,000 |
| Direct labour hours per unit | 1 | 2 |
| Machine hours per unit | 3 | 1 |
| Set-ups in the period | 10 | 40 |
| Orders handled in the period | 15 | 60 |
| Overhead costs | £ |
| Relating to machine activity | 220,000 |
| Relating to production run set-ups | 20,000 |
| Relating to handling of orders | 45,000 |
| 285,000 |
Calculate the production
(b) An activity based costing approach, using suitable cost drivers to trace overheads to products.
(c) Comment briefly on the key difference in how ‘fairly’ overheads are absorbed under each method.
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