The Gadget Co produces three products, A, B and C, all made from the same material. Until now, it has used traditional absorption costing to allocate overheads to its products. The company is now considering an activity based costing system in the hope that it will improve profitability. Information for the three products for the last year is as follows:A B CProduction and sales volumes (units) 15,000 12,000 18,000Selling price per unit K7.50 K12 K13Raw material usage (kg) per unit 2 3 4Direct labour hours per unit 0·1 0·15 0·2Machine hours per unit 0·5 0·7 0·9Number of production runs per annum 16 12 8Number of purchase orders per annum 24 28 42Number of deliveries to retailers per annum 48 30 62The price for raw materials remained constant throughout the year at K1·20 per kg. Similarly, the direct labour cost for the whole workforce was K14·80 per hour. The annual overhead costs were as follows:KMachine set up costs 26,550Machine running costs 66,400Procurement costs 48,000Delivery costs 54,320Required:(a) Calculate the full cost per unit for products A, B and C under traditional absorption costing, using direct labour hours as the basis for apportionment.(b) Calculate the full cost per unit of each product using activity based costing.(c) Using your calculation from (a) and (b) above, explain how activity based costing may help The Gadget Co improve the profitability of each product. QUESTION THREEThe Gadget Co produces three products, A, B and C, all made from the same material. Until now, ithas used traditional absorption costing to allocate overheads to its products. The company is nowconsidering an activity based costing system in the hope that it will improve profitability.Information for the three products for the last year is as follows:ACProduction and sales volumes (units)15,00012,00018,000Selling price per unitK7.50K12K13Raw material usage (kg) per unit24Direct labour hours per unit0:10:150:2Machine hours per unit0:50:70.9Number of production runs per annum16128Number of purchase orders per annum242842Number of deliveries to retailers per annum483062The price for raw materials remained constant throughout the year at K1 20 per kg. Similarly, thedirect labour cost for the whole workforce was K14 80 per hour. The annual overhead costs were asfollows:KMachine set up costs26,550Machine running costs66,400Procurement costs48,000Delivery costs54,320Required:(a) Calculate the full cost per unit for products A, B and C under traditional absorption costing,using direct labour hours as the basis for apportionment.(b) Calculate the full cost per unit of each product using activity based costing.(c) Using your calculation from (a) and (b) above, explain how activity based costing may help TheGadget Co improve the profitability of each product.

Absorption costing refers to the concept of evaluating the expenses involved with producing a…

Answered: e Gadget Co produces three products, A,…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The Gadget Co produces three products, A, B and C, all made from the same material. Until now, it has used traditional absorption costing to allocate overheads to its products. The company is now considering an activity based costing system in the hope that it will improve profitability. Information for the three products for the last year is as follows:
A B C
Production and sales volumes (units) 15,000 12,000 18,000
Selling price per unit K7.50 K12 K13
Raw material usage (kg) per unit 2 3 4
Direct labour hours per unit 0·1 0·15 0·2
Machine hours per unit 0·5 0·7 0·9
Number of production runs per annum 16 12 8
Number of purchase orders per annum 24 28 42
Number of deliveries to retailers per annum 48 30 62
The price for raw materials remained constant throughout the year at K1·20 per kg. Similarly, the direct labour cost for the whole workforce was K14·80 per hour. The annual overhead costs were as follows:
K
Machine set up costs 26,550
Machine running costs 66,400
Procurement costs 48,000
Delivery costs 54,320
Required:
(a) Calculate the full cost per unit for products A, B and C under traditional absorption costing, using direct labour hours as the basis for apportionment.
(b) Calculate the full cost per unit of each product using activity based costing.
(c) Using your calculation from (a) and (b) above, explain how activity based costing may help The Gadget Co improve the profitability of each product.

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