Moleskin Ltd manufactures a range of products used in the building industry. Manufacturing is undertaken using one of two processes: the Alpha Process and the Omega process. All of the products are manufactured in batches. The current pricing policy has been to absorb all overheads using direct labour hours to obtain total cost. Price is then calculated as total cost plus a 35 per cent mark-up.

A recent detailed analysis has examined overhead cost; the results are:

Required:

(a) Calculate the price per metre for both JT101s and GR27s detailed above, using traditional absorption costing based on direct labour hours.

(b) Calculate the price per metre for both JT101s and GR27s using activity-based costing. Assume that ‘Other overheads’ are allocated using direct labour hours.

(c) Outline the points that you would raise with the management of Moleskin in the light of your answers to (a) and (b).

(d) Outline the practical problems that may be encountered in implementing activity-based techniques and comment on how they may be overcome.

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Alpha Process cost Omega Process cost Set-up cost Handling charges Other overheads Analysis of overhead costs Cost per month £ 96,000 44,800 42,900 45,600 50,700 280,000 Monthly volume Batch size There are 4,000 direct labour hours available each month. Two of Moleskin's products are a joist (JT101) and a girder (GR27). JT101s are produced by the Alpha Process in a simple operation. GR27s are manufactured by the Omega Process, a more complex operation with more production stages. Both products are sold by the metre. Details for the two products are: Processing time per batch - Alpha - Omega Set-ups per batch Handling charges per batch Materials per metre Direct labour per metre Direct labour is paid £16 per hour. JT101 1,000 metres 1,000 metres 100 hours Monthly volume 480 hours 1,280 hours 1 movement £16 1/2 hour 260 set-ups 380 movements (see below) GR27 500 metres 50 metres 25 hours 2 5 movements £15 1/2 hour