ABC SYSTEM EXAMPLE

INFORMATION

THP Limited makes three main products, using broadly the same production methods and equipment for each. A

conventional product costing system is used at present, although an activity$-$based costing $($ABC$)$ system is being

considered.

Details of the three products for a typical period are:

Direct labour costs R$70$ per hour. Production overheads are absorbed on a machine hour basis. The rate for the period is

R$100$ per machine hour.

Further analysis shows that the total of production overheads can be divided as follows:

The following activity volumes are associated vith the product line for the period as a whole.

Total activities for the period:

REQUIRED:

Calculate the cost per unit for each product using conventional methods.

Calculate the cost per unit for each product using ABC principles.

Comment on the reasons for any differences in the costs in your answers to $1$ and $2.$