The Alfred Co produces three products, X, Y and Z, all made from thesame material. Until now,

Fantastic news! We've Found the answer you've been seeking!

Question:

The Alfred Co produces three products, X, Y and Z, all made from thesame material. Until now, Alfred Co. has used absorption costing method to allocate overheads to its products. The company is now considering an activity-based costing system and expected that it will improve profitability. Information for the products (X, Y and Z) for the last year is as follows - X Y Z Production and sales volumes (units) 16,000 12,000 18,000 Selling price/unit $7.50 $12 $13 Raw material usage kg/unit 2 3 4 Direct labour hours/unit 0.1 0.15 0.2 Machine hours/unit 0.5 0.7 0.9 No. of production runs per annum 16 12 8 No. of purchase orders per annum 24 28 42 No. of deliveries to retailers per annum 48 30 62 The price for raw materials remained constant at $ 1.20 per kg and the direct labour cost for the entire workforce was $ 14.80 per hour. The annual overhead costs were as given below: -
Machine set up costs - $ 25,500 Machine running costs - $ 66,400 Procurement costs - $ 48,000 Delivery costs - $ 54,300

Required:

(a) Calculate the full cost per unit for products X, Y and Z under traditional absorption costing, (using direct labour hours as the basis for apportionment). (6 Marks)

(b) Calculate the full cost per unit of product X, Y and Z using activity-based costing. (10 Marks)

(c) Using your calculation from (a) and (b) above, explain how activity-based costing may help The Alfred Co improve the profitability of each product. (7 marks) (d) The following statements have been made about Activity Based Costing and cost drivers under Alfred Co. (2 Marks)

(1) In addition to estimating more accurately the true cost of production, Activity Based Costing will also give a better indication of where cost savings can be made.

(2) Traditional absorption costing method tends to under-allocate overhead costs to low volume products. Which of the above statements is/are true?

A. (1) only

B. (2) only

C. (1) and (2)

D. Neither (1) nor (2)