Hoffman Ltd makes only two types of portable cooking stove, the Lightweight (LW) and the Megarange (MR). Last year it produced 4,500 LWs and 500 MRs. The direct materials cost £3.00 for one LW and £10.00 for one MR. The assembly workers who put the stoves together are all paid at the same rate of £6.30 an hour. When LWs are being produced each operative assembles nine stoves an hour and when MRs are being produced each operative assembles seven stoves an hour. This is the only labour that Hoffman classes as ‘direct labour’. The factory uses automated machinery to manufacture the components which are common to both stoves. The other components are bought in. Each stove uses 15 machine hours in its construction. For some time now, the company has been considering the introduction of activity-based costing. It has decided to recost last year’s production using this method so it can compare costs with those under its current absorption costing system. The current overhead absorption rate is based on the number of machine hours. Last year’s production activities have been analysed as follows: Activity Cost driver - Activity cost pool (£) Purchasing - Purchase order 20,000 Training - Training hour 1,000 Setting up machines - No. of set-ups 2,250 Running machines - Machine hours 14,250 Total £37,500 The analysis also quantified the number of cost drivers caused by each stove: Activity - No. of cost driver caused by LWs - No. of cost drivers caused by MRs Purchasing - 360 - 40 Training - 20 - 30 Setting up machines - 60 - 30 Running machines - 67,500 - 7,500 Questions 1. Calculate the absorption cost for each type of stove. 2. Calculate the activity-based cost for each type of stove
Hoffman Ltd makes only two types of portable cooking stove, the Lightweight (LW) and the Megarange (MR). Last year it produced 4,500 LWs and 500 MRs. The direct materials cost £3.00 for one LW and £10.00 for one MR. The assembly workers who put the stoves together are all paid at the same rate of £6.30 an hour. When LWs are being produced each operative assembles nine stoves an hour and when MRs are being produced each operative assembles seven stoves an hour. This is the only labour that Hoffman classes as ‘direct labour’. The factory uses automated machinery to manufacture the components which are common to both stoves. The other components are bought in. Each stove uses 15 machine hours in its construction.
For some time now, the company has been considering the introduction of activity-based costing. It has decided to recost last year’s production using this method so it can compare costs with those under its current absorption costing system. The current
production activities have been analysed as follows:
Activity Cost driver - Activity cost pool (£)
Purchasing - Purchase order 20,000
Training - Training hour 1,000
Setting up machines - No. of set-ups 2,250
Running machines - Machine hours 14,250
Total £37,500
The analysis also quantified the number of cost drivers caused by each stove:
Activity - No. of cost driver caused by LWs - No. of cost drivers caused by MRs
Purchasing - 360 - 40
Training - 20 - 30
Setting up machines - 60 - 30
Running machines - 67,500 - 7,500
Questions
1. Calculate the absorption cost for each type of stove.
2. Calculate the activity-based cost for each type of stove.
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