company is thinking about changing from a traditional absorption costing approach, based on machine hours, to an activity based costing system. Its three products are usually produced in batches of 10 items. Details are as follows: J K L Budget (units) 300 240 460 Direct material £50 £70 £60 Direct labour £20 £25 £16 Machine hours 3 5 2 Material requisitions 25 25 25 Orders from customers 15 12 23 Total production overheads budgeted are as follows: £ Quality control related 2,772 Stores and raw material related 6,300 Despatch related 9,702 Machine maintenance related 14,826 Quality inspections are carried out twice during each production run. Required: Calculate the unit cost of each product under both the traditional approach and activity based costing
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.
Change
A company is thinking about changing from a traditional absorption costing approach, based on machine hours, to an activity based costing system. Its three products are usually produced in batches of 10 items.
Details are as follows:
|
|
J |
K |
L |
|
Budget (units) |
300 |
240 |
460 |
|
Direct material |
£50 |
£70 |
£60 |
|
Direct labour |
£20 |
£25 |
£16 |
|
Machine hours |
3 |
5 |
2 |
|
Material requisitions |
25 |
25 |
25 |
|
Orders from customers |
15 |
12 |
23 |
Total production
|
|
£ |
|
Quality control related |
2,772 |
|
Stores and raw material related |
6,300 |
|
Despatch related |
9,702 |
|
Machine maintenance related |
14,826 |
Quality inspections are carried out twice during each production run.
Required:
Calculate the unit cost of each product under both the traditional approach and activity based costing.
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