Pullman Products manufactures ceramic discs for industrial use. It makes the discs in three sizes: small (S), medium (M) and large (L). Product costs are calculated using a simple absorption costing system which has only one overhead absorption rate (based on direct labour hours) for the whole manufacturing process. The following information is available:

All direct labour is paid at £6/hour. The budgeted fixed production overheads total £1,380,000. Selling prices are calculated by adding 150% to the production cost. Fierce competition from the Far East is forcing Pullman to review its selling prices, especially on its small disc. The recently appointed production manager has suggested that the use of activity-based costing may throw some light on this problem. To test the feasibility of this suggestion, a crude analysis of the firm€™s production overhead activities has been carried out and the results are shown below.

In the budget period, there were 15 firings for small discs, 5 firings for medium discs and 30 firings for large discs.

Task:
For each disc, calculate the unit production cost and selling price using:
a)  the absorption costing system;
b)  the activity-based costing system.
Comment on your findings.

Transcribed Image Text:

Material cost (£/disc) Direct labour hours per disc Weight of disc (kg) Budgeted production (units) Budgeted sales (units) 20 72 2.5 11.0 4,000 4,000 1.0 1.5 3.0 1.0 2,000 10,000 10,000 2,000 Cost driver Activity cost pool (£) Annual number of cost drivers Activity Clay preparation Moulding Firing Finishing Disc weight (kg) Disc weight (kg) Kiln firing Number of discs 180,000 60,000 240,000 912,000 60,000 50 16,000 48,000 Total 1,380,000