Case 2 Activity-based Costing (ABC) vs. Time-based Costing

Hello company manufactures three products, A, B and C. Forecast data concerning overheads (indirect costs) of the products for the next period as follows.

A

B

C

Forecast output (units)

50

60

80

Machine hours per unit

4

3

2

Number of customer orders

8

10

12

Number of quality control inspections

15

20

25

Number of engineering consultancies

8

7

5

Areas of workshops (m²)

3,000

4,500

2,500

Cost pools and related cost drivers

Cost pool $Cost driver

Machine operating 27,000Machine hours

Order processing 6,000No. of customer orders

Quality control 3,000No. of quality control inspections

Engineering consultancy 2,000No. of engineer consultancies

Rent of the campus 10,000 Areas of workshops

Required

Calculate the overhead cost to be absorbed by each of the products using the following absorption costing methods.

(1)A traditional absorption method based on a machine hour rate.

(2) An activity-based method, using the relevant cost drivers to trace overhead costs to the individual products.