Amalia Ltd currently manufactures and sells four products. Details of these products and relevant information are given below, for one period. Product P1 P2 P3 P4 Output (Unit) 240 200 160 240 Machine hours 8 6 4 6 (per unit) Cost per unit: Direct material £80 £100 £60 £20 Direct labour £56 £42 £28 £42 Production overheads: Indirect material £20,860 Indirect labour £10,500 Rent £7,200 Insurance £4,200 Depreciation £9,240 Production overheads are currently absorbed by using a plant-wide rate per machine hour. Required: (a) You have been asked by the financial director to calculate the cost per unit for each product. All overhead costs are absorbed on a machine hour basis (show your workings as full as possible). (b) Compare the traditional absorption costing approach with Activity-based costing, and discuss the reasons why Activity-based costing is considered to present a fairer valuation of the unit product cost.
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.
Amalia Ltd currently manufactures and sells four products. Details of these products and relevant information are given below, for one period.
Product P1 P2 P3 P4
Output (Unit) 240 200 160 240
Machine hours 8 6 4 6 (per unit)
Cost per unit:
Direct material £80 £100 £60 £20
Direct labour £56 £42 £28 £42
Production
Indirect material £20,860
Indirect labour £10,500
Rent £7,200
Insurance £4,200
Depreciation £9,240
Production overheads are currently absorbed by using a plant-wide rate per machine hour.
Required:
(a) You have been asked by the financial director to calculate the cost per unit for each product. All overhead costs are absorbed on a machine hour basis (show your workings as full as possible).
(b) Compare the traditional absorption costing approach with Activity-based costing, and discuss the reasons why Activity-based costing is considered to present a fairer valuation of the unit product cost.
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