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	2	3	4
Number of customer orders	10	10	15
Number of quality control inspections	20	30	20
Number of engineering consultancies	10	8	7
Areas of workshops (m2)	2,500	5,000	2,500

Cost pools and related cost drivers

Cost pool $ Cost driver

Machine operating 30,000 Machine hours

Order processing 7,000 No. of customer orders

Quality control 4,000 No. of quality control inspections

Engineering consultancy 2,500 No. 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.