A small business manufactures two products. Product A is a high volume product of relatively low...

  

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A small business manufactures two products. Product A is a high volume product of relatively low sales value and Product B is a low volume product of relatively high sales value. Product A results from an automated process where the labour input is from relatively low paid staff. Product B requires specialist input from staff paid at higher rates. The number of staff working on each product is similar. Over the past five years, only Product A was sold and the overheads were absorbed on the basis of the cost per RM of labour cost. Now that two products are made, the owner is worried that problems may arise as a result of the manner in which overheads are absorbed into the two products. Required: (a) Explain the problems that could arise in setting selling prices using this method of absorbing overheads. (b) Suggest how improvements could be made in the method of absorbing overheads into the cost of a product. A small business manufactures two products. Product A is a high volume product of relatively low sales value and Product B is a low volume product of relatively high sales value. Product A results from an automated process where the labour input is from relatively low paid staff. Product B requires specialist input from staff paid at higher rates. The number of staff working on each product is similar. Over the past five years, only Product A was sold and the overheads were absorbed on the basis of the cost per RM of labour cost. Now that two products are made, the owner is worried that problems may arise as a result of the manner in which overheads are absorbed into the two products. Required: (a) Explain the problems that could arise in setting selling prices using this method of absorbing overheads. (b) Suggest how improvements could be made in the method of absorbing overheads into the cost of a product.