Question 4: Activity Based Costing (ABC) 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: Production and sales volumes (units) Selling price per unit Raw material usage (kg) per unit Direct labour hours per unit Machine hours per unit Number of production runs per annum Number of purchase orders per annum Number of deliveries to retailers per annum A 15,000 B 12,000 с 18,000 $7.50 $12 $13 2 3 4 0-1 0-15 0-2 0-5 0-7 0-9 16 12 8 24 28 48 30 42 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 Machine running costs Procurement costs Delivery costs Required: $ 26,550 66,400 48,000 54,320 (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 4: Activity Based Costing (ABC) 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: Production and sales volumes (units) Selling price per unit Raw material usage (kg) per unit Direct labour hours per unit Machine hours per unit Number of production runs per annum Number of purchase orders per annum Number of deliveries to retailers per annum A 15,000 B 12,000 с 18,000 $7.50 $12 $13 2 3 4 0-1 0-15 0-2 0-5 0-7 0-9 16 12 8 24 28 48 30 42 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 Machine running costs Procurement costs Delivery costs Required: $ 26,550 66,400 48,000 54,320 (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.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Concept explainers
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.
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Transcribed Image Text:Question 4: Activity Based Costing (ABC)
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:
Production and sales volumes (units)
Selling price per unit
Raw material usage (kg) per unit
Direct labour hours per unit
Machine hours per unit
Number of production runs per annum
Number of purchase orders per annum
Number of deliveries to retailers per annum
A
15,000
B
12,000
C
18,000
$7.50
$12
$13
2
3
4
0-1
0-15
0-2
0-5
0-7
0.9
16
12
8
24
28
42
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
Machine running costs
Procurement costs
Delivery costs
Required:
$
26,550
66,400
48,000
54,320
(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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