Having knowledge and attended managerial accounting topic on activity based costing (ABC) you decide to experiment by applying the principles of ABC to the four products currently made and sold by your company. Details of the four products and relevant information are given below for one period.

Product A B C D

Output in units 120 100 80 120

Cost per unit Rs. Rs. Rs. Rs.

Direct Material 40 50 30 60

Direct Labour 28 21 14 21

Machine hours (per Unit) 4 3 2 3

The four products are similar and are usually produced in production runs of 20 units and sold in batches of 10 units.

The production overhead is currently absorbed by using a machine hour rate, and the total of the production overhead for the period has been analysed as followed.

________________________________________________________ RS_____

Machine department cost (rent, business rates, depreciation 10,430

And supervision)

Set-up cost 5,250

Stores receiving 3,600

Inspection / Quality control 2,100

Material handling and dispatch 4,620

You have ascertained that the cost drivers to be used are as listed below for the overhead cost shown.

Cost Cost Drivers

Set up cost Number of production runs

Stores receiving Requisitions raised

Inspection / Quality control Number of production runs

Material handling and dispatch Orders executed

The number of requisitions raised on the stores was 20 for each product and the number of orders executed was 42, each order being for a batch of 10 of a product.

Required.

1. To calculate the total cost for each product if all overhead cost are absorbed on a machine hour basis.
2. To calculate the total cost for each product, using activity-based costing.

To calculate and list the unit product cost from your figures in (a) and (b) above, to show the differences and to comment briefly on your conclusions.