Having the attention in ICMA course on activity based costing (ABC) you decide to experiment by applying the principle 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

Cost per unit:

120

Rs.

100

Rs.

80

Rs.

120

Rs.

Direct material

Direct labor

Machine hour per unit

40

28

4

50

21

3

30

14

2

60

21

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 overheads are currently absorbed by using a machine hour rate the total of production overheads for the period are analyzed as follows:

Machine department costs

(rent, business rates, depreciation, and supervision)

Setup costs

Stores receiving

Inspection / Quality control

Material handling and dispatch

Rs.

10,430

5,250

3,600

2,100

4,620

You have ascertained that the 'Cost Drivers' to be used are listed below for the overhead costs shown:

Costs

Cost Driver

Set up costs

Stores receiving

Inspection / Quality control

Material handling and dispatch

Number of production runs

Requisitions raised

Number of production runs

Orders executed

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

You are required:

a)To calculate the total costs of each product if all overhead costs are absorbed on machine hour basis.

b)To calculate the total costs for each product using activity based costing.

c)To calculate and list the unit product costs from your figures in (a) and (b) above to show the difference and to comment briefly on any conclusions which may be drawn and which could have profit and pricing implications.