Peter Ltd produces two products, Small and Large. The company currently absorbs overheads on the basis of
Question:
Peter Ltd produces two products, Small and Large. The company currently absorbs overheads on the basis of units produced, but they have read about a method based on activities undertaken and have asked you to help them investigate the method.
The output is Small 15,000 and Large 12,000.
The company has provided the following information;
Overhead activity Annual costs Cost driver Amount of activity
Small Large
Production £129,800 Machine hours 1260 1100
Quality inspection £58,080 No. of production runs 80 30
Material purchased £71,820 Purchase orders 30 12
Deliveries to retailers £18,080 Shipments 20 12
Required:
- Produce a statement that shows the overhead split using the original method, and showing the amount per unit produced.
[5 marks]
- Produce a statement showing the overhead split using Activity Based Costing. Show the amount per unit produced.
[10 marks]
- Explain the difference between the two methods and the difference in cost per unit.
[5 marks]
- Discuss the advantages and disadvantages of the two methods of overhead allocation.
[5 marks]
Total: 25 marks
Accounting
ISBN: 978-1118608227
9th edition
Authors: Lew Edwards, John Medlin, Keryn Chalmers, Andreas Hellmann, Claire Beattie, Jodie Maxfield, John Hoggett