Normally Emily would calculate the total cost of the order and the invoice value of the order based on a traditional costing system.

All the data needed to calculate the order cost using Activity Based Costing (ABC) is given.

Emily now needs to know what this would look like and what the impact of adopting ABC costing would be.

Emily Abrahams started Bike World, a specialist bike manufacturer, 7 years ago. Initially, she ran the business as a sole owner. She now has 28 skilled engineers who manufacture the products and 4 salespeople on her payroll. Since starting the business, she has been taking care of all the accounting herself.She is looking to make changes within the business and has asked you help organise and improve the accounting systems.

Emily applied traditional costing methods during all the 7 years period and based the pre-determined overhead rate and rent on total labour hours and total labour costs respectively. Bike World's product range includes folding bikes, hybrid bikes and 'flexy' bike options. Shiny Bikes Ltd recently placed an order for 150 units of the hybrid bike type. The order is expected to be delivered in 4 weeks' time. Since it is a customised order, Shiny Bikes Ltd will be invoiced at cost plus 20%.

This is her solution using a traditional costing system.

In the traditional method, the cost equals materials cost plus labour cost plus manufacturing overheads charged at Emily's pre-determined overhead rate.

Emily's pre-determined overhead rate is based on direct labour hours.

Transcribed Image Text:

9,160 9,160