Euro-Medi Plc manufactures a wide range of medical instruments. Two testing instruments (101 and 201) are produced at its highly automated Limerick plant. Data for December 2015 are as follows:
Instrument 101 Instrument 201
Direct materials........................€100 000..................€300 000
Direct manufacturing labour...........€20 000...................€10 000
Units produced.............................5 000.....................20 000
Actual direct labour-hours...............1 000..........................500
Manufacturing overhead is allocated to each instrument product on the basis of actual direct manufacturing labour-hours per unit for that month. Manufacturing overhead cost for December 2015 is €270 000. The production line at the Limerick plant is a machine-paced one. Direct manufacturing labour is made up of costs paid to workers minimizing machine problems rather than actually operating the machines. The machines in this plant are operated by computer specialists and industrial engineers.
Required
1. Calculate the cost per unit in December 2015 for instrument 101 and instrument 201 under the existing cost accounting system.
2. The accountant at Euro-Medi proposes combining direct manufacturing labour costs and manufacturing overhead costs into a single conversion costs pool. These conversion costs would be allocated to each unit of product on the basis of direct materials costs. Calculate the cost per unit in December 2015 for instrument 101 and instrument 201 under the accountant's proposal.
3. What are the benefits of combining direct manufacturing labour costs and manufacturing overhead costs into a single conversion costs pool?