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 $7.50 $12 $13 Raw Material usage (kg) per unit 2 3 4 Direct labour hours 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 $1.20 per kg. Similarly, the direct labour cost for the whole workforce was $14.80 per hour. The annual overhead costs were as follows: $ Machine set up costs 26,550 Machine running costs 66,400 Procurement costs 48,000 Delivery costs 54,320 Required: 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. Calculate the full cost per unit of each product using activity-based costing. Using your calculation from (a) and (b) above, explain how activity-based costing may help the Gadget Co improve the profitability of each product.
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
A `B C
Production and sales volumes (units) 15,000 12,000 18,000
Selling price per unit $7.50 $12 $13
Raw Material usage (kg) per unit 2 3 4
Direct labour hours 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 $1.20 per kg. Similarly, the direct labour cost for the whole workforce was $14.80 per hour. The annual overhead costs were as follows:
$
Machine set up costs 26,550
Machine running costs 66,400
Procurement costs 48,000
Delivery costs 54,320
Required:
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.
Calculate the full cost per unit of each product using activity-based costing.
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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