DK manufactures three products, W, X and Y. Each product uses the same materials and the same type of direct labour but in different quantities. The company currently uses a cost plus basis to determine the selling price of its products. This is based on full cost using an overhead absorption rate per direct labour hour. However, the managing director is concerned that the company may be losing sales because of its approach to setting prices. He thinks that a marginal costing approach may be more appropriate, particularly since the workforce is guaranteed a minimum weekly wage and has a three month notice period.e

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
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Chapter1: Financial Statements And Business Decisions
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An analysis of the company's indirect production costs shows the following:-
$
Cost driver
Material ordering costsa
220,000
100,000
|400,000
Number of supplier orders
Machine setup costsa
Number of batchese
Machine running costs
Number of machine hours
General facility costs
324,000
Number of machine hours
The following additional data relate to each product:
Producta
Y
Z
Machine hours per unite
54
Batch size (units)
500
400
1000
Supplier orders per batche
4
3
c) Calculate the full cost per unit of each product using activity-based costing and briefly
comment on the contrast to your results in part (b).
Transcribed Image Text:An analysis of the company's indirect production costs shows the following:- $ Cost driver Material ordering costsa 220,000 100,000 |400,000 Number of supplier orders Machine setup costsa Number of batchese Machine running costs Number of machine hours General facility costs 324,000 Number of machine hours The following additional data relate to each product: Producta Y Z Machine hours per unite 54 Batch size (units) 500 400 1000 Supplier orders per batche 4 3 c) Calculate the full cost per unit of each product using activity-based costing and briefly comment on the contrast to your results in part (b).
DK manufactures three products, W, X and Y. Each product uses the same materials and
the same type of direct labour but in different quantities. The company currently uses a cost
plus basis to determine the selling price of its products. This is based on full cost using an
overhead absorption rate per direct labour hour. However, the managing director is
concerned that the company may be losing sales because of its approach to setting prices.
He thinks that a marginal costing approach may be more appropriate, particularly since the
workforce is guaranteed a minimum weekly wage and has a three month notice period.e
a) Given the managing director's concern about DK's approach to setting selling prices,
discuss the advantages and disadvantages of marginal cost plus pricing AND total
cost-plus pricing.
The direct costs of the three products are shown below:
Product-
Budgeted annual production (units)
15,000-
24,000
20,000
$ per unita
$ per unite
$ per unita
Direct materials
354
40
45a
Direct labour ($10 per hour)
In addition to the above direct costs, DK incurs annual indirect production costs of
$1,044,000.
b) Calculate the full cost per unit of each product using DK's current method of
absorption
40
30-
50
Transcribed Image Text:DK manufactures three products, W, X and Y. Each product uses the same materials and the same type of direct labour but in different quantities. The company currently uses a cost plus basis to determine the selling price of its products. This is based on full cost using an overhead absorption rate per direct labour hour. However, the managing director is concerned that the company may be losing sales because of its approach to setting prices. He thinks that a marginal costing approach may be more appropriate, particularly since the workforce is guaranteed a minimum weekly wage and has a three month notice period.e a) Given the managing director's concern about DK's approach to setting selling prices, discuss the advantages and disadvantages of marginal cost plus pricing AND total cost-plus pricing. The direct costs of the three products are shown below: Product- Budgeted annual production (units) 15,000- 24,000 20,000 $ per unita $ per unite $ per unita Direct materials 354 40 45a Direct labour ($10 per hour) In addition to the above direct costs, DK incurs annual indirect production costs of $1,044,000. b) Calculate the full cost per unit of each product using DK's current method of absorption 40 30- 50
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