W is a manufacturing company that produces three products: X, Y and Z. Each uses the same resources, but in different quantities as shown in the table of budgeted data for 2010 below:

W’s budgeted production overhead costs for 2010 are \($400\) 000 and current practice is to absorb these costs into product costs using an absorption rate based on direct labour hours. As a result the production overhead cost attributed to each product unit is:

The management of S are considering changing to an activity based method of attributing overhead costs to products and as a result have identified the following cost drivers and related cost pools:

The remaining \($80\) 000 of overhead costs are caused by a number of different factors and activities that are mainly labour related and are to be attributed to products on the basis of labour hours.
Required:

(a) Calculate the production overhead cost attributed to each product unit using an activity based approach.

(b) Explain how W has applied Pareto Analysis when determining its cost drivers and how it may continue to use Pareto Analysis to control its production costs.

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Product X V Z Budgeted production 1500 2500 4000 Direct labour hours per unit 2 4 3. Machine hours per unit 3 2 3 Batch size 50 100 500 Machine setups per batch 2 3 1 Purchase orders per batch 4 Material movements per batch 10 45 4 6 4