Question:

Monday Ltd currently uses a traditional pre-determined overhead absorption rate for allocating production overhead to its products based on direct labour hours. Total

production overhead cost is 1,225,000 and it has been determined that four major

activities contribute towards this cost as follows:

Set Up 428,750

Stores 367,500

Production Control 245,000

Quality Control 183,750

Total 1,225,000

The company is investigating the use of activity-based costing and has ascertained the

following production information in relation to its range of products:

Product A Product B Product C Total

No. of units produced 2,000 50,000 10,000 62,000

Direct Labour Hours used 10,000 140,000 25,000 175,000

No. of Set Ups 40 5 80 125

Inspections 40 - 35 75

Production Orders 50 25 50 125

Inventory requisitions 400 30 320 750

You are required to :-

(a) Prepare a schedule showing the production overhead charged to Products A, B and C per unit using the pre-determined overhead absorption rate used by Monday Ltd, based on traditional costing methods.

(b) Identify cost drivers, calculate activity-based overhead absorption rates for Monday Ltd, and show the revised production overhead charged to products A, B, and C per unit.