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QUESTION 1
Rally Limited manufactures 4 products A , B, C and D, the direct labour cost per hour of which is £5. Other output and cost data are as follows: PRODUCT OUTPUTS IN UNITS
NUMBER OF
PRODUCTION
RUN IN THE
PERIOD
MATERIAL
COST PER
UNIT
DIRECT
LABOUR
PER UNIT
MACHINE
HOURS
PER UNIT
A 10 2 20 1 1
B 10 2 80 3 3
C 100 2 20 1 1
D 100 2 80 3 3
Other Overheads include the following: Short-run variable costs - 3, Expediting and scheduling costs - 9, Set-up costs - 10, Materials handling costs - 7, You are required to prepare the unit cost for each product using. a. Absorption Costing Method, and b. Activity Based Costing (ABC) Method.
SOLUTION 1:
a. Absorption costing approach using either direct labor or machine hours: DETAILS A B C D TOTAL £ £ £ £ £ Direct Materials 200 800 2,000 8, Direct Labour 50 150 500 1, Overheads (Notes) 700 2,100 7,000 21, TOTAL COSTS 950 3,050 9,500 30,500 44, UNITS PRODUCED 10 10 100 100 COST PER UNIT £95 £305 £95 £ NOTE 1: Overheads is derived viz : Total Overheads/Total No of Hours worked. = £(3,080+9,100+10,920+7,700)/440 Hours. = £30,800/440 hrs = £70 per Direct Labour/Machine Hours worked. NOTE 2: Total No of Hours worked is derived viz: PRODUCTS UNITS PRODUCED MULTIPLY BY MACHINE HOURS TOTAL NO OF HOURS A 10 X 1 10 B 10 X 3 30 C 100 X 1 100 D 100 X 3 300 440
D 100 3 7 2,
- Set Up Cost = £10,920 / 14 Production Runs = £780 per run = Set up cost X Production run Product Production Run Set up cost per run (£) Total (£) A 2 780 1, B 2 780 1, C 5 780 3, D 5 780 3,
- Expediting & Scheduling Costs (E&SC)= 9,100 / 14 Production runs = £650 per run. = E&SC X Production run Product Production Run E & S Cost (£) Total (£) A 2 650 1, B 2 650 1, C 5 650 3, D 5 650 3,
- Materials Handling Cost = £7,700 / 14 Production runs = £550 per run = MHC X Total Production run Product Production run M. H Cost (£) Total (£) A 2 550 1, B 2 550 1, C 5 550 2, D 5 550 2,
