Playthings Limited produces two dolls houses, the standard and the deluxe. The direct costs and overhead information relating to these two dolls houses are listed as follows.

Playthings currently absorb their total overheads into their dolls houses on the basis of machine hours. The selling price of dolls houses is total absorption cost plus 50%. The directors are concerned about a build up in the warehouse of standard dolls houses. Deluxe models are still selling well and the current price charged by Playthings is the most competitive in the market: their nearest rivals are selling the same type of dolls house for £300. Investigations have shown that competitors are selling comparable standard dolls houses for £165. You have been asked for your advice on the current costing system at Playthings and whether you can suggest a better way in which to allocate overheads to products together with any other suggestions you are able to provide.

Required

(a) Calculate the current total absorption cost and selling price for standard and deluxe dolls houses based on the absorption of total overheads on a machine hour basis.

(b) Determine suitable cost drivers for the four overhead cost pools.

(c) Calculate the activity-based cost of standard and deluxe dolls houses and determine the selling price of each based on activity-based cost plus 50%.

(d) Given your results in (a), advise the directors on how they might reduce the cost of deluxe dolls houses in order to compete more effectively in the market.

Transcribed Image Text:

Direct materials Direct labour Labour hours Annual production Direct materials orders Employees Machine hours Annual number of set ups Standard £50 £30 5 2,500 400 5 10,000 15 Overheads Machining Factory supervisor Set up related overheads Purchasing department costs Total overheads Deluxe £76 £42 7 1,000 600 10 5,000 35 £ 45,000 30,000 50,000 25,000 150,000