Kumar Limited makes three 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:

Hours per unit Materials per unit $ Volumes (units)

Labour Hours Machine Hours

Product X 0.5 1 16 600

Product Y 1.5 1 10 1,300

Product Z 1 2 20 7,000

Direct labour cost $7 per hour and production overheads are absorbed on a machine hour basis. The rate for the period is $25 per machine hour.

(a)You are required to calculate the cost per unit for each product using conventional methods.

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

Overheads %

Costs relating to set-ups 20

Costs relating to machinery 18

Costs relating to materials handling 25

Costs relating to inspection 37

TOTAL 100%

The following activity volumes are associated with the product line for the period as a whole. Total activities for the period:

Product Type Number of Set-ups Number of movement of materials Number of inspections

Product X 60 10 110

Product Y 110 25 170

Product Z 420 80 620

TOTAL 590 115 900

You are required:

(b)To calculate the cost per unit for each product using ABC principles

(c)To comment on the reasons for any differences in the costs in your answers to (a) and (b)

(d)Explain the concept of Activity Based Management and how it can shape continuous improvement in organisation.